Today is January 1, 2015. Your friend Joe has just signed a contract to play for

Question

Today is January 1, 2015. Your friend Joe has just signed a contract to play for the Oil Kings. He will receive $900,000 for 2015, $1,000,000 for 2016, $1,100,000 for 2017, and $1,200,000 for 2018. All payments are made at the beginning of the year. Assume 8% annual interest rate (EAR).

a. What is the present value of his contract?

b. If instead of increasing annual payments Leo wants equal dollar amount month-end cheques, how large is his monthly pay (assuming the present value remains the same)?

Explanation / Answer

a) PV = 900,000/1.08 + 1,100,000/1.08^2 + 1,200,000/1.08^3 = $ 2,729,004.7 (ans)

b) Rate = 8/12 = 0.667 %

PV = 2,729,004.7 = P*31.91

P = $ 8,551.84 (ans)

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