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 $477,000 today, plus $477,000 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.)

Present value $ 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 $477,000 today, plus $477,000 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 value is $477,000 (paid today) + the present value of the future income stream...use PVordinary annuity "PVoa"...

PVoa = PMT [(1 - (1 / (1 + i)^n)) / i]
= 477,000[(1 - (1 / 1.07^6)) / 0.07]
= 477k[(1 - 0.66634) / 0.07]
= 477k[4.76654]
= $2,273,639.42...+ the first $477k paid "today" = $2,750,639.42

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