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Inputs
Payments under the revised contract	Cash flows from revised contract
Discount rate (per year)	0.00%
Present Value using a timeline
Year	Cash Flow from current contract	Cash flows from revised contract
2000	(5,900,000)	0
2001		0
2002		0
2003		0
2004		0
2005		0
2006		0
2007		0
2008		0
2009		0
2010		$1,193,248.20
2011		$1,193,248.20
2012		$1,193,248.20
2013		$1,193,248.20
2014		$1,193,248.20
2015		$1,193,248.20
2016		$1,193,248.20
2017		$1,193,248.20
2018		$1,193,248.20
2019		$1,193,248.20
2020		$1,193,248.20
2021		$1,193,248.20
2022		$1,193,248.20
2023		$1,193,248.20
2024		$1,193,248.20
2025		$1,193,248.20
2026		$1,193,248.20
2027		$1,193,248.20
2028		$1,193,248.20
2029		$1,193,248.20
2030		$1,193,248.20
2031		$1,193,248.20
2032		$1,193,248.20
2033		$1,193,248.20
2034		$1,193,248.20
2035		$1,193,248.20
Present value of current contract	($5,900,000)?
Present value of revise contract	($29,831,205)?
DIfference (current - revised)	($23,931,205)?

This problem refers to the article shown at the bottom of the spreadsheet. Your task here is to compare the cash flows from the current contract (one more payment in 2000) with the cash flows from the revised contract (25 payments starting in 2011). Start with a 0% discount rate. Enter the cash flows from the current contract and the revised contract in the timeline. The cash flows from the revised contract dont start until 2011, but you need to enter zero in each year prior to that time in order for the NPV function to work. Find the NPV of the current contract and the revised contract using the NPV function. Assume that the payment under the current contract would be discounted by one year (the date of the article is Jan. 4, 2000, so assume its not received until the end of 2000). This means you can enter the year 2000 cash flow directly into the NPV function. Put the difference of the NPVs of the contracts in B16.

Q14: What is the present value of the current contract at a 0% discount rate? $5,900,000

Q15: What is the present value of the revised contract at a 0% discount rate? $29,831,205

Now find the break-even discount rate, i.e., the rate at which the present value of the current contract equals the present value of the revised contract. You can find this with the Goal Seek tool.

Q16: What is the break-even discount rate?

Answer & Explanation Solved by verified expert

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