Question

The football coach at a midwestern university was given a 5-year employment contract that paid $225,000 the first year, and increased at an 8% uniform rate in each subsequent year. At the end of the first year's football season, the alumni demanded that the coach be fired. The alumni agreed to buy his remaining years on the contract by paying him the equivalent present sum, computed using a 12% interest rate. How much will the coach receive

Answer 1

the amount received is $822,462

Step-by-step explanation:

The computation of the amount received is shown below:

= Amount ×{(1 - (1 + growth rate)^n(1 + interest rate)^-n)÷ (interest rate - growth rate)}

= $243,000 × {(1 - (1 + 0.08)^4(1.12)^-4) ÷ (12% - 8%)

= $243,000 × (0.135385 ÷ 0.04)

= $822,462

The $243,000 comes from

= $225,000 × (1 + 0.08)

= $243,000

hence, the amount received is $822,462