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# Calculating PV, future spending plans and analyzing credit d

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1. Mike Polanski is 30 years of age and his salary next year will be \$40,000. Mike forecasts that his salary will increase at a steady rate of 5 percent per annum until his retirement at age 60.
a. if the discount rate is 8 percent, what is the PV of these future salary payments?
b. If Mike saves 5 percent of his salary each year and invests these savings at an interest rate of 8 percent, how much will he have saved by age 60?
c. If Mike plans to spend these savings in even amounts over the subsequent 20 years, how much can he spend each year?

2. Kangaroo Autos is offering free credit on a new \$10,000 car. You pay \$1,000 down an then \$300 a month for the next 30 months. Turtle Motors next door does not offer free credit but will give you \$1000 off the list price. If the rate of interest is 10 percent a year, (about .83 percent a month) which company is offering a better deal?

3. Which would you prefer?
a. An investment paying interest of 12 percent compounded annually.
b. An investment paying interest of 1.7 percent compounded semiannually.
c. An investment paying 11.5 percent compounded continuously.

4. In 1880 five aboriginal trackers were each promised the equivalent of 100 Australian dollars for helping to capture the notorious outlaw Ned Kelley. In 1993 the granddaughters of two of the trackers claimed that his reward had not been paid. The prime minister of Victoria stated that, if that was true, the government would be happy to pay the \$100. However, the granddaughters also claimed that hey were entitled to compound interest. How much was each entitled to if the interest rate was 5 percent? What if it was 10 percent?

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For 3b., I think the amount of percent should be 11.7% not 1.7%.

1. Mike Polanski is 30 years of age and his salary next year will be \$40,000. Mike forecasts that his salary will increase at a steady rate of 5 percent per annum until his retirement at age 60.

a. if the discount rate is 8 percent, what is the PV of these future salary payments?

Please see the attached excel file for calculation.

PV = 760,662.53

b. If Mike saves 5 percent of his salary each year and invests these savings at an interest rate of 8 percent, how much will he have saved by age 60?

Total saving = 382,714.30

c. If Mike plans to spend these savings in even amounts over the subsequent 20 years, how much can he spend each year?

PVA = W x 1 - 1 where PVA is the present value
(1 + ...

#### Solution Summary

This solution is comprised of a detailed explanation to answer what is the PV of these future salary payments.

\$2.19