The Western Railway Company (WRC) has been offered a 100-year contract to haul a fixed amount of coal each year from Wyoming to Illinois. Under the terms of the agreement, WRC will receive $4,200,000 now in exchange for its hauling services valued at $360,000 at the end-of-year one (EOY 1), $375,000 at EOY 2 and continuing to grow by $15,000 per year through EOY 100. If the WRC's cost of capital is 12% per year, is this a profitable agreement for WRC? Present Value of a growing annuity - (1 − 1(1 + g)¯n\ PV = C
The Western Railway Company (WRC) has been offered a 100-year contract to haul a fixed amount of coal each year from Wyoming to Illinois. Under the terms of the agreement, WRC will receive $4,200,000 now in exchange for its hauling services valued at $360,000 at the end-of-year one (EOY 1), $375,000 at EOY 2 and continuing to grow by $15,000 per year through EOY 100. If the WRC's cost of capital is 12% per year, is this a profitable agreement for WRC? Present Value of a growing annuity - (1 − 1(1 + g)¯n\ PV = C
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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Transcribed Image Text:The Western Railway Company (WRC) has been offered a 100-year contract to haul a fixed amount of
coal each year from Wyoming to Illinois. Under the terms of the agreement, WRC will receive
$4,200,000 now in exchange for its hauling services valued at $360,000 at the end-of-year one (EOY 1),
$375,000 at EOY 2 and continuing to grow by $15,000 per year through EOY 100. If the WRC's cost of
capital is 12% per year, is this a profitable agreement for WRC?
Present Value of a growing annuity
PV = C
PV
= 360,000
-
− 1(1 + g)¯`
r-g
- (1+0.12)-
-100'
-
0.12 0.00015
= $19,942,704.00
PV is > than Initial Payment so the agreement is profitable.
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