Question

In: Economics

Biff works for ACME, a multinational conglomerate. He is 60 and plans on working five more...

Biff works for ACME, a multinational conglomerate. He is 60 and plans on working five more years (including the current year). He expects to earn $100,000 in each of the 5 years he has left at ACME. ACME, however, wants to buy Biff out of his contract. Assuming Biff has an 8% discount rate, calculate the present value of his remaining days at ACME. Be careful: do not discount the current year and make no other assumptions than these.

Solutions

Expert Solution

Discount rate = 8%

Income every year = 100,000

Year Income Present value of Income Rough work to calculate present value of Income
0 100,000                         100,000.00 [100,000 / 1.08^0]
1 100,000                           92,592.59 [100,000 / 1.08^1]
2 100,000                           85,733.88 [100,000 / 1.08^3]
3 100,000                           79,383.22 [100,000 / 1.08^4]
4 100,000                           73,502.99 [100,000 / 1.08^5]
                        431,212.68

Present value of Income = 431,212.68

Rahul Sunny answered 1 year ago
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