Can you help me with this calculation, if instead of paying $124K in four equal annual installments we pay this amount up front what would be PV ?
Yes, I can help you with that calculation. To find the present value (PV) if you pay the entire amount upfront instead of in equal annual installments, we need to use the concept of discounting.
Discounting is the process of calculating the current value of a future cash flow by applying a discount rate. In this case, we would need to discount each future installment back to the present value using an appropriate discount rate.
To calculate the present value, follow these steps:
1. Determine the discount rate: The discount rate represents the rate of return required for an investment. This rate should be based on factors such as the risk associated with the payments and the opportunity cost of alternative investments. Let's assume a discount rate of 5% for this example.
2. Calculate the present value for each individual installment: Use the formula PV = CF / (1 + r)^n, where PV is the present value, CF is the cash flow, r is the discount rate, and n is the number of periods. In this case, n is the number of years.
Let's break down the calculation:
Year 1 installment: PV1 = 124,000 / (1 + 0.05)^1
Year 2 installment: PV2 = 124,000 / (1 + 0.05)^2
Year 3 installment: PV3 = 124,000 / (1 + 0.05)^3
Year 4 installment: PV4 = 124,000 / (1 + 0.05)^4
3. Calculate the total present value: Sum up all the individual present values to get the total present value. PV = PV1 + PV2 + PV3 + PV4
By following these steps, you can calculate the present value if the full $124,000 is paid upfront instead of in equal annual installments.