Question

Tom purchases a study manual and a subscription to ADAPT to make sure he passes Exam 2/FM. Tom expects to spend 300 hours studying for the exam. For passing the exam, Tom anticipates he will earn an additional $100 per month payable at the end of each month. The first payment is made 7 months from today. Tom plans to retire exactly 38 years from today. Using 6% effective annual interest, find the present value of the additional earnings per hour of studying if Tom passes.

Answer 1

First, we calculate the present value of additional earnings 6 months from today

Present value of additional earnings 6 months from today is calculated using PV function in Excel :

rate = 6%/12 (converting annual rate into monthly rate)

nper = 450 (From 6 months from today to 38 years from today, total number of months = (38 * 12) - 6 = 450)

pmt = -100 (Additional earnings per month. This is entered with a negative sign because it is a payment)

PV is calculated to be $17,880.16

A1 X foc =PV(6%/12,450,-100) B C D 1 $17,880.16

Next, we calculate the present value of additional earnings today

present value = future value / (1 + (annual rate / 12))^{number of months}

present value = $17,880.16 / (1 + (6% / 12))⁶

present value = $17,353.02

Present value of additional earnings per hour of studying = present value of additional earnings today / number of hours studied

Present value of additional earnings per hour of studying = $17,353.02 / 300

Present value of additional earnings per hour of studying = $58

The answer is C