Global Enterprises has just signed a $3 million contract. The contract calls for a payment of $.5 million today, $.9 million one year from today, and $1.6 million two years from today. What is this contract really worth if Global Enterprises can earn 12 percent on its money

$2.58 million

Explanation:

Given that

First payment today = 0.5million

Second payment a year time = 0.9 million

Third payment in 2 years time = 1.6 million

In calculating the real worth of the contract, second payment must be brought back by one period at 12% rate because the payments a made a year from today and also the third payment must be brought back two period at 12% rate because the payments is made two years from today.

Thus

Real value/worth = 0.5 + (0.9 ÷ [1 + 0.12]) + (1.6 ÷ [1 + 0.12]^2)

= 0.5 + 0.803 + 1.275

= 2.578 million

Approximately $2.58million

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