An R&D lab will receive $250,000 when a proposed contract is signed, a $200,000 progress payment at the end of Year 1, and $400,000 when the work is completed at the end of Year 2. What is the present worth of the contract at 15%? Draw cash flow diagram for this problem.
An R&D lab will receive $250,000 when a proposed contract is signed, a $200,000 progress payment at the end of Year 1, and $400,000 when the work is completed at the end of Year 2. What is the present worth of the contract at 15%? Draw cash flow diagram for this problem.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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![**Problem Statement:**
An R&D lab will receive $250,000 when a proposed contract is signed, a $200,000 progress payment at the end of Year 1, and $400,000 when the work is completed at the end of Year 2. What is the present worth of the contract at 15%?
**Instructions:**
1. Determine the present worth of each payment using the given interest rate of 15%.
2. **Cash Flow Diagram:**
- At time 0 (contract signing): Cash inflow of $250,000.
- At the end of Year 1: Cash inflow of $200,000.
- At the end of Year 2: Cash inflow of $400,000.
The diagram should have arrows indicating cash inflows at the respective times, starting with the initial $250,000 inflow at time 0, followed by $200,000 at the end of Year 1, and $400,000 at the end of Year 2. Each arrow represents a cash receipt at the respective time interval.
3. Calculate the present worth of each cash inflow using the formula:
\[
PW = \frac{F}{(1 + i)^n}
\]
where \( PW \) is the present worth, \( F \) is the future cash inflow, \( i \) is the interest rate (15% or 0.15), and \( n \) is the number of years.
4. Sum the present worths to find the total present worth of the contract.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fe801909c-59c9-4b6d-8f92-02e1e3a7b70b%2Fc3a8e744-3eb5-425c-9826-394481b6a185%2F6lok1fi_processed.png&w=3840&q=75)
Transcribed Image Text:**Problem Statement:**
An R&D lab will receive $250,000 when a proposed contract is signed, a $200,000 progress payment at the end of Year 1, and $400,000 when the work is completed at the end of Year 2. What is the present worth of the contract at 15%?
**Instructions:**
1. Determine the present worth of each payment using the given interest rate of 15%.
2. **Cash Flow Diagram:**
- At time 0 (contract signing): Cash inflow of $250,000.
- At the end of Year 1: Cash inflow of $200,000.
- At the end of Year 2: Cash inflow of $400,000.
The diagram should have arrows indicating cash inflows at the respective times, starting with the initial $250,000 inflow at time 0, followed by $200,000 at the end of Year 1, and $400,000 at the end of Year 2. Each arrow represents a cash receipt at the respective time interval.
3. Calculate the present worth of each cash inflow using the formula:
\[
PW = \frac{F}{(1 + i)^n}
\]
where \( PW \) is the present worth, \( F \) is the future cash inflow, \( i \) is the interest rate (15% or 0.15), and \( n \) is the number of years.
4. Sum the present worths to find the total present worth of the contract.
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