In: Finance
What is the present value of the following cash flows at a discount rate of 6%? Years 1 – 5 $10,000 Years 6 – 10 $12,000 Years 11 – 20 $15,000
If a professor currently earns $80,000 per year and expects annual salary increases of 3%, approximately how long will the professor have to work before his/her annual salary reaches $500,000 per year?
Answer :1) Correct Option is (C.) $141544
Calculations :
Year | Cash Flows | PVF @ 6% | Present Value of Cash Flows |
1 | 10000 | 0.943396226 | 9433.962264 |
2 | 10000 | 0.88999644 | 8899.9644 |
3 | 10000 | 0.839619283 | 8396.19283 |
4 | 10000 | 0.792093663 | 7920.936632 |
5 | 10000 | 0.747258173 | 7472.581729 |
6 | 12000 | 0.70496054 | 8459.526485 |
7 | 12000 | 0.665057114 | 7980.685363 |
8 | 12000 | 0.627412371 | 7528.948456 |
9 | 12000 | 0.591898464 | 7102.781562 |
10 | 12000 | 0.558394777 | 6700.737323 |
11 | 15000 | 0.526787525 | 7901.812881 |
12 | 15000 | 0.496969364 | 7454.540454 |
13 | 15000 | 0.468839022 | 7032.585334 |
14 | 15000 | 0.442300964 | 6634.514466 |
15 | 15000 | 0.417265061 | 6258.975911 |
16 | 15000 | 0.393646284 | 5904.694256 |
17 | 15000 | 0.371364419 | 5570.466279 |
18 | 15000 | 0.350343791 | 5255.156867 |
19 | 15000 | 0.33051301 | 4957.695157 |
20 | 15000 | 0.311804727 | 4677.070903 |
Present value of Cash Flows | 141544 |
Answer : Correct Option is A.62 years
Calculation:
Calculation of Number of years
Using NPER function of Excel
=NPER(rate,pmt,pv,fv)
where
rate is 3%
pmt is 0
pv is the present value i.e 80000
fv is future value i.e 500000
=NPER(3%,0,80000,-500000)
The number of years is 62 years