Question

ST Trucking just signed a $3.8 million contract. The contract calls for a payment of $1.1 million today, $1.3 million one year from today, and $1.4 million two years from today. What is this contract worth today at a discount rate of 8.7 percent?
A) $3,783,648.48
B) $3,480,817.37
C) $2,108,001.32
D) $3,202,223.89
E) $3,202,840.91

Answer 1

Answer: Option (B)

Explanation:

Given :

Contract = $3.8 million

Initial Payment = $1.1 million

Payment - Year One = $1.3 million

Payment - Year Two = $1.4 million

From the given information , we can evaluate the current value of the contract using present value:

$Present\ Value=\frac{Cash\ flow}{(1 + r)^n}$

$Present\ Value = 1.1\ million + \frac{1.3\ million}{(1+0.087)^1} + \frac{1.4\ million}{(1+0.087)^2}$

Present Value =  $3,480,817.37