Question

An internet service provider expects to lose money in each of the first four years. Losses are expected to be $50 million in year one, $40 million in year two, $30 million in year three and $5 million in year four. An interest rate of 10% per year is used.

(a) What is the Present worth (in year 0 ) of the losses for all four years?

Answer 1

To find the Present Worth (in year 0) of the losses for all four years, we can calculate the present value of each year's loss and sum them up using the formula PV = FV / (1 + i)^n. The total Present Worth is $104.99 million.

Step-by-step explanation:

To find the Present Worth (in year 0) of the losses for all four years, we need to calculate the present value of each year's loss and then sum them up.

We can use the formula:

PV = FV / (1 + i)^n

Where:

• PV is the present value
• FV is the future value
• i is the interest rate per year
• n is the number of years

Let's calculate:

Year 1: PV = 50 / (1 + 0.1)^1 = $45.45 million

Year 2: PV = 40 / (1 + 0.1)^2 = $33.06 million

Year 3: PV = 30 / (1 + 0.1)^3 = $22.13 million

Year 4: PV = 5 / (1 + 0.1)^4 = $3.35 million

The Present Worth of the losses for all four years is the sum of these present values:

Total PV = $45.45 million + $33.06 million + $22.13 million + $3.35 million = $104.99 million