Question

Civil Engineering consulting firms that provide services to outlying communities are vulnerable to a number of factors that affect the financial condition of the communities, such as bond issues and real estate developments. A small consulting firm entered into a fixed-price contract with a large developer, resulting in a stable income of $260,000 per year in years 1 through 3. At the end of that time, a mild recession slowed the development, so that parties signed another contract for $190,000 per year for 2 more years. Determine the present worth of the two contracts at an interest rate of 10% per year.The present worth of the two contracts is determined to be $

Answer 1

Answer:

=  $894,329.13

Explanation:

The present worth of the contracts are the the present value of the streams of cash inflow discounted at the reacquire rate of return of 10%

Present Value of First contract

Present Value = A × (1- (1+r)^(-n) )/ r

                        = 260,000 × (1 - 1.1^(-3)/0.1

                     =$646,581.52

Present Value of Second contract

Present value in year 3

= 190,000 × (1- 1.1^(-2) )/0.1

= 329,752.0661

Present value in year 0

PV in year 2 × (1+r)^(-n)

329,752.0661 × (1.1^(-3)

=$247,747.60

Total present worth of contracts

=$247,747.60 + $646,581.52

=  $894,329.13