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 $468,000 today, plus $468,000 at the end of each of the following six years for permission to do this. If the appropriate interest rate is 6 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 $

Explanation / Answer

Formula for present value of an annuity = PV= A [ (1+k)n-1/k(1+k)n]

PV = Present value of fund=?

A = periodical instalments =468000 per year

k=interest rate=6% pa

n=periods=6 yrs

Present Value of payments receivable for next six years=468,000 *[(1.06)^6-1]/0.06(1.06)^6

=468,000*4.9173

=$2,301,308

So Total present value of the cash flow stream= Current payment+PV of future payments

=$468,000+$2,301,308=$2,769,308

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