What formula did you use to calc PV? If the present value stays the same, would you not divide the PV by (12*4)?
Calling on all Finance gurus
Wondering if any of you more seasoned NAGTROCers can help me with a Finance question:
Problem 4
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)?
Now part A is quite simple, just discounting each payment back to present value: I get $3,721,597.317
But in part B, it asks to recalculate the payments in monthly intervals using the same present value. This is where I'm lost. I tried using the standard annuity formula:
Po = C/r [1 - 1/(r^t)]
But I'm confused as to how to adjust for the equivalent monthly paycheques. HELP THIS NOOB, thanks
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Problem 4
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)?
Now part A is quite simple, just discounting each payment back to present value: I get $3,721,597.317
But in part B, it asks to recalculate the payments in monthly intervals using the same present value. This is where I'm lost. I tried using the standard annuity formula:
Po = C/r [1 - 1/(r^t)]
But I'm confused as to how to adjust for the equivalent monthly paycheques. HELP THIS NOOB, thanks
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Po = P/(1+r)^t
I did this individually for each of the values. The reason you cannot simply divide the PV by 48 is that when you are dealing with monthly payouts, you have to convert your EAR to EMR which I figured out. Unforunately when I plug everything back in to the annuity formula I get a "C" value that does not match any of the available answers.
I did this individually for each of the values. The reason you cannot simply divide the PV by 48 is that when you are dealing with monthly payouts, you have to convert your EAR to EMR which I figured out. Unforunately when I plug everything back in to the annuity formula I get a "C" value that does not match any of the available answers.
BDA, thanks anyways, I handed the assignment in
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Wanna be my NAGTROC Official tutor? Hahaha
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