Question

Periodic outlays for inventory control software at Baron Chemicals are expected to be $174,000 immediately, $200,000 in 1 year, and $350,000 in 2 years. What is the present worth of the costs at an interest rate of 10% per year, compounded continuously? Choose the closest value.

Answer 1

Answer:

Baron Chemicals

Present worth of the cost = $644,900

Explanation:

a) Data and Calculations:

Interest rate = 10%

Cost of inventory control software:

               Outlays        Discount Factor     Present Value

Year 0 = $174,000       1                                $174,000

Year 1 = $200,000      0.909                          181,800

Year 2 = $350,000      0.826                        289,100

Total      $724,000                                      $644,900

b) The present value of the outlays is obtained by multiplying the cash outlay by the discount factor.  Then, the sum of the present values of the years' outlays are added together to obtain the present worth of the costs.