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14 April, 20:33

Periodic outlays for inventory control software at Baron Chemicals are expected to be $150,000 immediately, $200,000 in 1 year, and $350,000 in 2 years. What is the present worth of the costs at an interest rate of 10% per year, compounded continuously

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  1. 14 April, 20:43
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    Total present value=$617,523.24

    Explanation:

    The formula for calculating continuous compounding is given as follows

    F=P (e^it)

    F=future value

    P=present value

    i=interest rate

    t=time involved i. e 1 year or 2 year

    e=Mathematical constant=2.7183

    By applying above mentioned formula, the present value of inventory control software by Baron Chemicals shall be calculated as follows:

    Present value of year 2 Cash flow = $286,555.76

    ($350,000/e^10%*2)

    Present value of year 1 Cash flow = $180,967.48

    ($200,000/e^10%*1)

    Present value of year 0 Cash flow = $150,000

    Total present value=$617,523.24
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