Molly,president of Molly's Muffins,is considering franchising.She has a potential franchise agreement that would see her receive payments of $28,000,$24,000,and $20,000 at the end of years 1,2,and 3 respectively,and then $12,000 per year after that for 17 years.If Molly requires a return of 10%,then what is the present value of this stream of cash flows? (Round answer to the nearest whole dollar)
A) $132,636
B) $145,900
C) $143,354
D) $156,574
E) $124,440

Question

Quizplus · Accepted Answer

Step 1 - Find the present value of each individual cash flow.
PV = 11ea7fdb_fc1c_c2ac_a768_8ddd1626e7e7_TB2902_11 PV = 11ea7fdb_fc1c_c2ad_a768_337959539feb_TB2902_11 = $25,454.55
PV = 11ea7fdb_fc1c_c2ae_a768_4bcb7d2f8548_TB2902_11 = $19,834.71
PV = 11ea7fdb_fc1c_c2af_a768_9fd64370d562_TB2902_11 = $15,026.30
Step 2 - Add the present value of the individual cash flows together.25,454.55 + 19,834.71 + 15,026.30 = $60,315.56
Step 3 - Find the present value of the annuity and discount it back to today.
PV = PMT × 11ea7fdb_fc1c_c2b0_a768_71458531a8b9_TB2902_11 PV = 12,000 × 11ea7fdb_fc1c_c2b1_a768_d378cb53b022_TB2902_11 = $96,258.64
Using a financial calculator:
N = 17, I = 10, PMT = -12,000, FV = 0, cpt PV = $96,258.64
PV = 11ea7fdb_fc1c_c2b2_a768_8f1339116c42_TB2902_11 = $73,320.54
Step 4 - Add the present values together.
$60,315.56 + $73,320.54 = $132,636.10

Molly,president of Molly's Muffins,is Considering Franchising