Can somebody loan me a
dime their financial expertise?
Problem: Contract is signed between A and B in Year One, requiring B to Pay A the following sums upon performance of contract two years later:
Year Three: $110,000
Years Four through Seven: $100,000 in each year
Year Eight: $90,000
Assume probability of both performance and payment upon performance is 100%. Assume that current interest rates at signing are around 2.5% for three-year treasuries and 2.8% for ten-year treasuries and high-grade municipal bonds.
Question: When evaluating A’s net worth at signing, what current total value should be assigned to the $600,000 in total payments scheduled to be received in years three through eight?
UPDATE: Thanks to everyone for the interesting and informative replies. To clarify a couple of things, this is regarding a historical transaction rather than something contemporary, and I appreciate there isn’t any definitive answer, given the different definitions of what one might mean by the contract’s actual value at the time of signing.