The present value of the firm is given by expected future profits of the firm in present value. Future profits are discounted by the present value of a dollar earned in the future. To mathematically state this arrangement we must first subtract the total costs from the total revenue, yielding respective profits. We must also know by how much to discount to be accurate in our predictions if we are to project the firm's worth. To specify and formalize this arrangement we need a mathematical equation such as equation 1, below. The value of the firm is:
( ) ∑ = + -n t t tt r TCTR 1 1
Equation 1
where TR is the total revenue, TC is the total cost, r is the discount rate and t is time interval 1, 2, 3, ......n.
If expected profits are $150,000 for every year over the next three years and the discount rate is expected to be 5.5 percent, on average, for all three years, what are the next three years worth to an owner in sum?