# calculating the present value

Given the attached information ...

For the discount rates of 4% and 7%,

1. Find the formula for and compute the present value (in 2004 dollars) of the cost of the Exxon Valdez spill.

2. Suppose that Exxon could have adopted stricter rules to ensure a rested crew and a sober master at the beginning of 1989. Enforcing these rules would have cost Exxon P dollars every subsequent year in the future, and the crash wouldn't have happened. If Exxon could have estimated the cost of the spill in 1989, how much would they have been willing to pay each year to avoid a crash?

*** YOU DO NOT REQUIRE INFLATION INDEX FOR 2004. THE QUESTION JUST ASKS TO FIND PRESENT VALUE (IN 2004 DOLLAR) USING DISCOUNT RATE OF 4% AND 7%**

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#### Solution Preview

Please refer to the excel spreadsheet.

I have put down the cash flows that Exxon has incurred after the accident on the spreadsheet. In column I, I have found the present value of cash flows at the rate of 4% , it is $9,413 million and in column J I have calculated the present value of the cash flows at the rate of 7%, it is $8,052.38 million.

Now, if we take the rate of 4% and the present value figure obtained in column I, Exxon would be ...

#### Solution Summary

Help is given with calculating the present value.