Civil engineering consulting firms that provide services to outlying communities
ID: 2812027 • Letter: C
Question
Civil engineering consulting firms that provide services to outlying communities are vulnerable to a number of factors that affect the financial condition of the communities, such as bond issues, real estate developments, etc. A small consulting firm entered into a fixed-price contract with a spec home builder, resulting in a stable income of $345,000 per year in years 1 through 8. At the end of that time, a mild recession slowed the development, so the parties signed another contract for $195,000 per year for 5 more years. Determine the present worth of the two contracts at an interest rate of 15% per year.
The present worth of the two contracts is determined to be $
Explanation / Answer
Present worth of 1st contract = Annuity * [ 1 - 1 / ( 1 + r)n] / r
Present worth of 1st contract = 345,000 * [ 1 - 1 / ( 1 + 0.15)8] / 0.15
Present worth of 1st contract = 345,000 * 4.487322
Present worth of 1st contract = $1,548,126.06
Present value of 2nd contract at year 8 = 195,000 * [ 1 - 1 / ( 1 + 0.15)5] / 0.15
Present value of 2nd contract at year 8 = 195,000 * 3.352155
Present value of 2nd contract at year 8 = $653,670.2441
Present value of 2nd contract today = 653,670.2441 / ( 1 + 0.15)8
Present value of 2nd contract today = $213,685.9623