Question

Mom and Pop Groceries has just dispatched a year's supply of groceries to the government of the Central Antarctic Republic. Payment of $185,000 will be made one year hence after the shipment arrives by snow train. Unfortunately there is a good chance of a coup d′état in which case the new government will not pay. Mom and Pop's controller therefore decides to discount the payment at 30%, rather than at the company's 14% cost of capital.

a. Is it proper to use 30% as the discount rate in this situation?

b. How much is the $185,000 payment really worth if the odds of a coup d′ état are 15%? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Payment value $

Answer 1

a. No, 30% discount rate is not proper because there is no proper method to get this 30%.

b.

Worth of payment now = $\frac{0.85*185000}{1.15}=136,739.13$

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