Les moore retired as president of Good man Snack Foods Company but is currently on a consulting contract for $35,000 per year for the next 10 years a. If Mr. Moore's opportunity cost(potential return)is 10 percent, what is the present value of his consulting contract? b. Assume Mr Moore will not retire for two more years and will not start to receive his 10 payments until the end of the third year, what would be the value of his deferred annuity? Solution: ppendix d a. PVA=AX PVIFA (10%, 10 periods) PVA=$35000X6.145=$215,075 b Deferred annuity-Appendix d PVA=AX PVIFA (I=10%, 10 periods) PVA=$35,000×6145=$215075 Now, discount back this value for 2 periods PⅤ=FⅤxPⅤF(1=10%,2 periods) Appendix e $215075X826=$177,652 OR A dix D PⅤA=$35,000(6814-1.7360 where n=12,n=2andi=10%) $35,000(5078)=$177,730 The answer is slightly different from the answer above due to rounding in the tables CopyrightC 2005 by The McGray-Hill Companies, Inc. -314Copyright © 2005 by The McGraw-Hill Companies, Inc. S-314 9-18. Les Moore retired as president of Goodman Snack Foods Company but is currently on a consulting contract for $35,000 per year for the next 10 years. a. If Mr. Moore's opportunity cost (potential return) is 10 percent, what is the present value of his consulting contract? b. Assume Mr. Moore will not retire for two more years and will not start to receive his 10 payments until the end of the third year, what would be the value of his deferred annuity? Solution: Appendix D a. PVA = A x PVIFA (10%, 10 periods) PVA = $35,000 x 6.145 = $215,075 b. Deferred annuity—Appendix D PVA = A x PVIFA (i = 10%, 10 periods) PVA = $35,000 x 6.145 = $215,075 Now, discount back this value for 2 periods PV = FV x PVIF (i = 10%, 2 periods) Appendix B $215,075 x .826 = $177,652 OR Appendix D PVA = $35,000 (6.814 – 1.7360 where n = 12, n = 2 and i = 10%) = $35,000 (5.078) = $177,730 The answer is slightly different from the answer above due to rounding in the tables