Les Moore retired as president of Goodman Snack Foods Company but is currently o

Question

Les Moore retired as president of Goodman Snack Foods Company but is currently on a consulting contract for $62,000 per year for the next 15 years. Use Appendix B and Appendix D for an approximate answer, but calculate your final answer using the formula and financial calculator methods.

If Mr. Moore’s opportunity cost (potential return) is 9 percent, what is the present value of his consulting contract? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

Assuming Mr. Moore will not retire for two more years and will not start to receive his 15 payments until the end of the third year, what would be the value of his deferred annuity? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

If Mr. Moore’s opportunity cost (potential return) is 9 percent, what is the present value of his consulting contract? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

Explanation / Answer

Answer-a: Les Moore contract payment per year = $62,000 Time of contract = 15 years Opprotunity Cost = Discount rate = 9% $62000 is the amount he is going to receive for next 15 years Therefore Annuity = $62,000 Time= n= 15 Rate 9% Present value = Annuity/rate x (1 - 1/(1+rate)^n) = $62000/9% x (1 - 1/(1+9%)^15) So the required present value = $499,762.68 Answer-b: Les Moore contract payment per year = $62,000 Time of contract = 15 years Opprotunity Cost = Discount rate = 9% $62000 is the amount he is going to receive for next 15 years but only after 2 years Now, Annuity = $62,000 Time= n= 15 Rate 9% Present value = Annuity/rate x (1 - 1/(1+rate)^n) = $62000/9% x (1 - 1/(1+9%)^15) the required deferred value = $499,762.68 at the end of two years So the required present value of this deferred annuity = discounting $499762.68 for two years at 9% discount rate. Required present value = $499762.68/(1+9%)^2 = $420,640.25

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