Question

You just signed a 10 year contract that will pay you $1,000,000 at the end of next year, with a scheduled pay increase of 5% each year. If your cost of capital is 8.5%, how much is the contract worth?
Starting Salary	Years on Contract	Growth Rate	Cost of Capital
$            1,000,000	10	5%	8.50%
Manual				NPV
Year	Salary	PV

Answer 1

The contract worth is calculated as present value of future salary payment for 10 years. Present value is calculated by discounting the salary at cost of capital of 8.50%
Year	Salary		Discount factor @ 8.50%		Present value (Salary*Discount factor)
1	$1,000,000.00		0.92166	1/(1.085^1)	$921,658.99
2	$1,050,000.00	1000000*1.05	0.84946	1/(1.085^2)	$891,928.05
3	$1,102,500.00	1050000*1.05	0.78291	1/(1.085^3)	$863,156.18
4	$1,157,625.00	1102500*1.05	0.72157	1/(1.085^4)	$835,312.43
5	$1,215,506.25	1157625*1.05	0.66505	1/(1.085^5)	$808,366.87
6	$1,276,281.56	1215506.25*1.05	0.61295	1/(1.085^6)	$782,290.52
7	$1,340,095.64	1276281.56*1.05	0.56493	1/(1.085^7)	$757,055.34
8	$1,407,100.42	1340095.64*1.05	0.52067	1/(1.085^8)	$732,634.20
9	$1,477,455.44	1407100.42*1.05	0.47988	1/(1.085^9)	$709,000.84
10	$1,551,328.22	1551328.22*1.05	0.44229	1/(1.085^10)	$686,129.84
					$7,987,533.26
Thus, the contract is worth $7,987,533.26.