The contract to be recommended is contract 2 with the highest present value.
How to choose a contract to recommend?
The contract with the highest present value is the contract that should be recommended. Present value is the current value of future cash flows because the current value of money is more valuable than the future value of money in the same amount. Present value can be calculated by using NPV formula.
NPV = [tex]\sum\frac{C_{n}}{(1+r)^{n}}[/tex]
Contract 1
NPV = [tex]\frac{2,500,000}{(1+0.09)^1} + \frac{2,500,000}{(1+0.09)^2} +\frac{2,500,000}{(1+0.09)^3}+\frac{2,500,000}{(1+0.09)^4}[/tex]
NPV = $ 8,099,300
Contract 2
NPV = [tex]\frac{2,000,000}{(1+0.09)^1} + \frac{3,000,000}{(1+0.09)^2} +\frac{4,000,000}{(1+0.09)^3}+\frac{5,500,000}{(1+0.09)^4}[/tex]
NPV = $ 11,344,975
Contract 3
NPV = [tex]\frac{6,000,000}{(1+0.09)^1} + \frac{1,000,000}{(1+0.09)^2} +\frac{1,000,000}{(1+0.09)^3}+\frac{1,000,000}{(1+0.09)^4}[/tex]
NPV = $ 7,826,876
Your questions is incomplete, but most probably your full question was (image attached)
Thus, the contract to be recommended is contract 2 with the highest present value.
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