As an way to pay for various software that your company sells, a high-tech servi
ID: 2784623 • Letter: A
Question
As an way to pay for various software that your company sells, a high-tech service company has your company in any one of three ways: (1 pay $508,000 now. (2) pay $1.48 million 5 years from now or (3) 2 years from now You want to earn a rea!return of 12% per year and the inflation rate is t pay $200000 now and $419,000 4% per year in the specialized software market Use PW analysis to determine which offer you should accept with inflation considered Select offer with the highest PW value of $ Prex Prex 4 5flNext> 1211.2017Explanation / Answer
Nominal Rate - Real Rate of return + Inflation rate
= 12% + 4%
Nominal Rate of return is 16%.
To solve this question calculate present value of each option at 16% interest rate.
In first option, $508,000 is pays now, so Present value of option 1 is $508,000.
In option 2
Present value = $1,480,000 / (1 + 16%) ^ 5
= $1,480,000 / 2.1003
= $704,647.26
Present value of second option is $704,647.26.
Option 3
Present value = $200,000 + [$419,000 / (1 + 16%) ^ 2]
= $200,000 + ($419,000 / 1.3456)
= $200,000 + $311,385.26
= $511,385.26.
Present value of third option is $511,385.26..
Since, Present value of second option is highest among all three option. So you should choose second option and present value of second option is $704,647.26.
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