Question

1.Your salary next year is expected to be $40,000. Assume you expect your salary to grow at a steady rate of 3% per year for another 24 years. If the appropriate cost of capital (aka discount rate) is 9.5%, what is the PV today of your future salary cash flow stream? For simplicity, assume the salary amounts are at the end of each of the next 24 years. Answer to zero (0) decimal places.

2.What is the PV of a 12-year annuity due (payments at beginning of period, aka annuity in advance) of $652 if the required return is 10.9% Answer to 2 decimal places.

3.How long does it take a present value amount to triple if the expected return is 13.1%? Answer to 2 decimal points.

Answer 1

Answer to Question 1:

Expected Salary = $40,000
Increment Rate = 3%
Cost of Capital = 9.50%
Period = 24 years

Present Value of Salary = $40,000/1.095 + $40,000*1.03/1.095^2 + … + $40,000*1.03^22/1.095^23 + $40,000*1.03^23/1.095^24
Present Value of Salary = ($40,000/1.095) * [1 - (1.03/1.095)^24] / [1 - (1.03/1.095)]
Present Value of Salary = $40,000 * [1 - (1.03/1.095)^24] / 0.065
Present Value of Salary = $40,000 * 11.842676
Present Value of Salary = $473,707

So, present value of future salary cash flow stream is $473,707