You wrote a piece of software that does a better job of allowing computers to ne

Question

You wrote a piece of software that does a better job of allowing computers to network than any other program designed for this purpose. A large networking company wants to incorporate your software into their systems and is offering to pay you $540,000 today, plus $540,000 at the end of each of the following six years for permission to do this. If the appropriate interest rate is 7 percent, what is the present value of the cash flow stream that the company is offering you? (Round answer to the nearest whole dollar, e.g. 5,275.)

Explanation / Answer

The present of your future cash inflows is lesser in value as your money will be worth less in future. Today you might be able to by pringles at $2 but after 5 years it might have increase to $6. Even with a raise that doubles your salary you still be able to buy lesser than what you could earlier. Hence we discount the future cash flows to get their worth today.

PV = $540,000 +  $540,000/ (1 + 7/100) 1 +  $540,000/ (1 + 7/100) 2  +  $540,000/ (1 + 7/100) 3  +  $540,000/ (1 + 7/100) 4 +  $540,000/ (1 + 7/100) 5+  $540,000/ (1 + 7/100) 6

=$540,000 + $2,573,931.416 = $3113931.416

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