Question

Present and future value tables of 1 at 9% are presented below.

   

	PV of $1	FV of $1	PVA of $1	FVAD of $1	FVA of $1
1	0.91743	1.09000	0.91743	1.0900	1.0000
2	0.84168	1.18810	1.75911	2.2781	2.0900
3	0.77218	1.29503	2.53129	3.5731	3.2781
4	0.70843	1.41158	3.23972	4.9847	4.5731
5	0.64993	1.53862	3.88965	6.5233	5.9847
6	0.59627	1.67710	4.48592	8.2004	7.5233

  

Mustard's Inc. sold the rights to use one of its patented processes that will result in cash receipts of $2,700 at the end of each of the next six years and a lump sum receipt of $4,200 at the end of the fifth year. The total present value of these payments if interest is at 9% is:

Multiple Choice

• $14,842.

• $9,382.

• $2,730.

• $12,112.

Answer 1

Total present value of payments = Annual cash payment x Present value annuity factor (r%, n) + Lump sum payment at the end of 5th year x Present value factor (r%, n)

= 2,700 x Present value annuity factor (9%, 6) + 4,200 x Present value factor (9%, 5)

= 2,700 x 4.48592 + 4,200 x 0.64993

= 12,111.98 + 2,729.71

= $14,842 (Rounded to whole number)

Correct option is (a)

Kindly comment if you need further assistance. Thanks