1. Your company is considering construction project. There is a payment due right now of $50,000. Another progress payment is due in one year of $100,000 and a final payment is due of $200,000 after two years. When it is done in two years it should be able to be sold for $500,000. What is the present value of the profit on the project? The relevant interest rate is 5%.
2. Your company is embarking on a construction project. The project will involve building for two years. After one year, a payment of $200,000 is expected from your company to the builder. After the second year, another $200,000 will be paid to the builder. At the end of year three and for the next ten years, the project will yield $500,000 per year in net profits. That is, the total number of years of profits of will be 11. Calculate the present value of the profit for the project. The interest rate is 5%.
3. A bond pays a coupon of $120 one year from today and $120 in year 2, 3, 4, and 5. At the end of year (five years from today) the bond will be retired and you will receive the $1,000 face value. What is the present value price of the bond today?
The solution explains how to calculate the present value. Construction projects a company is embarking on is determined.