As the result of a lawsuit a company was ordered to pay $20 billion in total for the damage made, through a 14-quarter payment plan. The company sell pay $3 billion at the end of the first quarter, and $2 billion at the end of the second quarter. For the remaining twelve quarters, the company will pay $1.25 billion each if the leterest rate is 3% per quarter, what is the present equivalent of this payment plan?

As the scenario is asking for the present value, we can calculate the whole thing backward. First of all, for the twelve payments of $1.25 billion, the amount oved at the beginning of the 12 quarters will be calculated in the following way.

So it seems that the payment plan can be changed and the payment will not be the same all the time. However, we are treating the scenario as three different periods. For the first period/quarter, you will pay $3 billion. For the second quarter, you will pay $2 billion. And for the rest of 12 quarters (eg, three years you will pay $1.25 billion each. We can still use Plan 2 of Table 4-1 for this case. We just have to find out what the PV is at different times.

Scenario 4 Example 4-18)

Solution

As the scenario is asking for the present value, we can calculate the whole thing backward. First of all, for the twelve payments of $1.25 billion, the amount owed at the beginning of the 12 quarters will be calculated in the following way. int % per quarter; pmt-s billion; do pay attention to the unit; nper= quarters; FV= meaning you pay off everything. So PV S billion. Write down your answer to the second decimal point. Now this PV becomes the new FV for the second quarter, int= %; pmt=$ billion; nper quarter to accrue interest; FV = $ billion, which is the same as the PV of the next 12 quarters. billion. Write down your answer to the second decimal point. So your PV at the beginning of the second quarter = $ Again, this PV becomes the new FV for the first quarter, int= 96; billion; pmt=$ .nper= quarter to accrue interest; billion, which is the same as the PV at the beginning of the second quarter. FV = $ billion. Write down your answer to the second decimal point. Here you can see. So your PV at the beginning of the first quarter = $ Show All X So your PV at the beginning of the first quarters the present value is much less than the future value: this is one way to trick the system. On the surface, you seem to pay the full amount of $20 biton But if we billion. Write down your answer to the second decimal point. Hare you can sex, put the whole payment plan in the perspective of present value, you are actually paying less