Question

When Marlyn Monroe died, ex-husband Joe DiMaggio vowed to place fresh flowers on her grave every Sunday for as long as he lived. The week after she died in 1962, a bunch of fresh flowers the the former baseball player thought appropriate for the star cost about $7. Based on the actuarial tables, "Jolton' Joe" could expect to live for 26 years after the actress died. Assume the the EAR is 10.4 percent. Also, assume that the price of the flowers will increase at 4.3 percent per year, when expressed as an EAR. Assuming that each year has exactly 52 weeks, what is the present value of his commitment? Joe began purchasing flowers the week after Marlyn died.

Answer 1

Here,

Cash flows are calculated using the growth rate of 4.3% ( In Excel Worksheet)

r = 10.4%

n = 26 years

Following is the Excel Worksheet Showing the calculations of Present value of the commitment:-

Following is the Formula Sheet of above Excel Worksheet for better understanding of formulas used:-

So, Present Value of his commitment is $4605.87