Question
Mom and Pop Groceries has just dispatched a year's supply of groceries to the government of the Central Antarctic Republic. Payment of $220,000 will be
Mom and Pop Groceries has just dispatched a year's supply of groceries to the government of the Central Antarctic Republic. Payment of $220,000 will be made one year hence after the shipment arrives by snow train. Unfortunately, there is a good chance of a coup d'tat in which case the new government will not pay. Mom and Pop's controller therefore decides to discount the payment at 50%, rather than at the company's 12% cost of capital. 1. Is it proper to use 40% as the discount rate in this situation?
a. No
b. Yes
b. How much is the $220,000 payment really worth if the odds of a coup d'tat are 25%? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
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