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Your salary next year is expected to be $40,000
Your salary next year is expected to be $40,000. Assume you expect your salary to grow at a steady rate of 3% per year for another 26 years and you retire at that time. If the appropriate cost of capital (aka discount rate) is 9.7%, what is the PV today of your future salary cash flow stream? For simplicity, assume the salary amounts are all at the end of each of the next 26 years. Answer to zero (0) decimal places. Hint: this is a growing "annuity" valuation problem.
Expert Solution
Computation of Present Value of Growing Annuity:
Present Value of Growing Annuity = [P/(r-g)]*[1-((1+g)/(1+r))^n]
Here,
P = First payment = $40,000
r = rate = 9.7%
g = growth rate = 3%
n = number of periods = 27 years
Present Value of Growing Annuity = (($40,000/(0.097-0.03))*((1-(1.03/1097)^27))) = $597,014.93
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