Expected profits over next two years:

Year 1: $105,000
Year 2: $230,000

If the discount rate is 7%, what is the present value of profits at Year 1 and Year 2?

How do I get this answer?

Thanks,

Chad

To find the present value of profits at Year 1 and Year 2, you need to discount these future profits by applying the discount rate of 7%. The present value of an amount in the future is calculated by dividing the future amount by (1 + discount rate) raised to the power of the number of years in the future.

Let's calculate the present value of Year 1's profit.
Present Value of Year 1 Profit = Year 1 Profit / (1 + discount rate) ^ 1
Present Value of Year 1 Profit = $105,000 / (1 + 7%) ^ 1
Present Value of Year 1 Profit = $105,000 / 1.07
Present Value of Year 1 Profit ≈ $98,130.84

Now, let's calculate the present value of Year 2's profit.
Present Value of Year 2 Profit = Year 2 Profit / (1 + discount rate) ^ 2
Present Value of Year 2 Profit = $230,000 / (1 + 7%) ^ 2
Present Value of Year 2 Profit = $230,000 / 1.1449
Present Value of Year 2 Profit ≈ $200,624.98

Therefore, the present value of profits at Year 1 and Year 2 is approximately $98,130.84 and $200,624.98, respectively.