Question

Your salary next year is expected to be $40,000. Assume you expect your salary to grow at a steady rate of 4% per year for another 25 years. If the appropriate cost of capital (aka discount rate) is 9%, what is the PV today of your future salary cashflow stream? [For simplicity, assume the salary amounts are at the end of each of the next 25 years.] Answer to nearest $1000.

246,000

247,000

391,000

553,000

800,000

Answer 1

correct option is d. 553,000

Step-by-step explanation:

given data

expected salary = $40,000

steady rate = 4% per year

time = 25 year

discount rate = 9%

solution

we use here formula for present in tvm growing annuity problem is

present value = expected salary ÷ ( discount rate- steady rate ) - [ {expected salary × (1+steady rate)^time) ÷ ( discount rate- steady rate ) } ÷ ( 1+discount rate)^time)] .................1

put here value we get

present value =
`(40000)/(0.9-0.4) -((40000*(1+0.04)^(25))/(0.09-0.04))/((1+0.09)^(25))`

present value = $552,679 nearly by = $553,000

so correct option is d. 553,000