The management of a national chain of fast-food outlets is selling a 12 year franchise in a certain city and would like to estimate the present value of the franchise based on past data. It is known that the profit generated per year is $10600 and this is true for the entire period of the franchise.

As the rate of interest is 3%, to determine the present value the profit earned in each year has to be discounted at 3%. The present value is the sum of the discounted profit for all the 12 years.

This is equal to `12000/1.03 + 12000/1.03^2 + ... 12000/1.03^12`

= `(12000/1.03)*((1 - 1/1.03^12)/(1 - 1/1.03))`

= 119448.05

**The present value of the franchise is $119448.05**

## See eNotes Ad-Free

Start your **48-hour free trial** to get access to more than 30,000 additional guides and more than 350,000 Homework Help questions answered by our experts.

Already a member? Log in here.