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    Opportunity Costs and Deferred Annuity

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    Question: Les Moore retired as president of Goodman Snack Foods Company, but is currently on a consulting contract for $35,000 per year for the next 10 years.

    a. If Mr. Moore's opportunity cost (potential return) is 10 percent, what is the present value of his consulting contract?

    b. Assuming Mr. Moore will not retire for two more years and will not start to receive his 10 payments until the end of the third year, what would be the value of his deferred annuity?

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    Solution Preview

    a) PV of an annuity = C/r*(1-1/(1+r)^n)
    Where C= Annuity = $35000
    r=opportunity cost = 10%
    n= ...

    Solution Summary

    This solution illustrates the appropriate formulas needed to calculate the opportunity cost and the deferred annuity. All calculations are provided.