shawen Posted September 29, 2014 Share Posted September 29, 2014 Today is January 1, 2012. Your friend Joe has just signed a contract to play for a baseball team. He will receive $900,000 for 2012, $1,000,000 for 2013, $1,100,000 for 2014, and $1,200,000 for 2015. 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)? the answer is for a: $3,721,597.317 but i don't how they got it and i tried i am getting 3087125.38 and part b i have no idea how to ddo it so please help me out thanks so much Link to comment Share on other sites More sharing options...
pack34 Posted September 29, 2014 Share Posted September 29, 2014 I'm getting the correct answer. What formula are you using? For 2012, for your rate are you using 1.08^0 or 1.08^1? Check your textbook. PV = ( FV ) / ( (1 + r)^n ) FV = Your future value amount r = your interest rate n = the amount of years between now and then (2012-2012 = 0, 2014-2012=2, etc) shawen 1 Share Link to comment Share on other sites More sharing options...
shawen Posted September 29, 2014 Author Share Posted September 29, 2014 1.08^1 this one Link to comment Share on other sites More sharing options...
shawen Posted September 29, 2014 Author Share Posted September 29, 2014 kk i got that, how would to do part B thaat's where i am suck Link to comment Share on other sites More sharing options...
pack34 Posted September 29, 2014 Share Posted September 29, 2014 kk i got that, how would to do part B thaat's where i am suck Notice the key difference between parts B and A. Instead of doing annual lumps (present value of a single amount) you're dealing with consecutive payments of an equal amount, which is an annuity. Typically all of this is taught in it's own chapter or section with just present and future values of lump sums and annuity. You'll have the equation for this in your textbook. They typically also have a table in the front or back cover showing the PV(IFA) values for a range of rates and periods. Link to comment Share on other sites More sharing options...
V9s Posted September 29, 2014 Share Posted September 29, 2014 First, calculate the effective monthly interest rate by solving for r: (1+i)=(1+r/12)^12 where i is the annual interest rate (0.08) and r is the effective monthly rate. Then, solve the eq below for R (monthly payment): $3,721,597.317 = R * [1-(1+r/12)^(-n*12)]/r r: effective monthly rate n: no. of years in annuity They typically also have a table in the front or back cover showing the PV(IFA) values for a range of rates and periods. Don't do this. Learn the annuity formula...it will make your life easier if you're more of a numbers/quant guy. Link to comment Share on other sites More sharing options...
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