Question

Elam, a contractor, just signed a contract with a developer to provide services in a new home development. The developer has agreed to pay Elam $15,000 up front (today) 30,000 in two years and another $50,000 five years from today. Elam anticipates costs of $7,000 three years from today and another $25,000 eight years from today. What is the total value of the contract to Elam if the interest rate is 3.7%

Answer 1

Answer:

Total present value                          $59,620.10

Explanation:

The computation of the total value is shown below:

Year       Cash flow       PVF at 3.7%   Present value

0              $15,000            1                  $15,000

1                     0              0.9643           $0

2               $30,000     0.9299            $27,897

3                -$7,000      0.8967            -$6,276.90

4                $0               0..8647            $0

5                $50,000     0.8339           $41,695

6               $0                0.8041            $0

7                $0               0.7754            $0

8               -$25,000    0.7478          -$18,695

Total present value                          $59,620.10