You are in business negotiations with Mr. Mohammed Ezekiel Abedube, a Nigerian p

Question

You are in business negotiations with Mr. Mohammed Ezekiel Abedube, a Nigerian prince who you met on the
Internet after he sent you an unsolicited e-mail. In exchange for your assistance, he promises you quarterly
payments of $200,000 (at the end of each quarter) for 2 years and then an annual payment of $1,000,000 (at the
end of each year) for years 3 through 10. If you consider the time value of money to be 8% and assuming that he
makes good on his promise, what are his future payments worth to you today?

Explanation / Answer

PV of the cash flow of the offer

= PV of cash flow of $200000 paid each quarter for 2 years + PV of cash flow of $1000000 paid for the last seven years from 3rd year to 10th year

= $200000 x PVIFA(2%, 8) + $1000000 x [PVIFA(8%,10) - PVIFA(8%,2)]

= $200000 x 7.325 + $1000000 x (6.71 - 1.783)

= $1465000 + $4927000

=$6392000

Note,

for the first two years, the quarterly discount rate = 8%/4 = 2%

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.