Homework Answers
We have to calculate the present values of all future cash flows receivable by discounting at 5.5% in order to calculate the present worth of the offer
PV Factor
= 1 / ( 1 + Rate of interest) ^ Number of years
So, PV Factor for year 2 will be
= 1 / ( 1.055 ^ 2)
= 1 / 1.113025
= 0.898452
The following table shows the calculations :
| Calculations | Years | 0 | 1 | 2 | 3 |
| A | Cash Flows | 1000 | 42000 | 45000 | 48000 |
| B | PV Factor | 1 | 0.947867 | 0.898452 | 0.851614 |
| C = A x B | Present Value | 1000 | 39810.43 | 40430.36 | 40877.46 |
| D = Sum C | Net Present Value | 122118.24 |
So, as per above calculations, option c is the correct option
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