Activety A
Activety A
Activety A
Solution:
Plan A = spending $5 million now then $5.5 million at the top of every year
trough years 1 to 10.
The present value of the $5 million being spent now $5 million (as it is in the
current point in time).
Present value of $5.5 million spend at the end of each year through years 1 to
10
Using the compound interest table to determine the present worth factor, the
factor for 10% and 10 years = 6.145
Thus, present value of $5.5 million spend at the end of each year through years
1 to 10 = A* present worth factor
Present value of $25 million paid 2 years from now = F(P/F , i , n ) where F =
$25 million, i =10% and n=2.
Present value of $30 million paid 7 years from now = F(P/F , i , n ) where
F=$30 million, i =10% and n=7.
This is because, in present value terms, the power company is paying a lower
amount of money in Plan A.