1 answer

Sam is 18 years old now, and is thinking about taking a 5-year university degree. The...

Question:

Sam is 18 years old now, and is thinking about taking a 5-year university degree. The degree will cost him $25,000 each year. After he's finished, he expects to make $50,000 per year for 10 years, $75,000 per year for another 10 years, and $100,000 per year for the final 10 years of his working career. If Linus lives to be 100, and if real interest rates stay at 5% per year throughout his life, what is the equal annual consumption he could enjoy until that date?

Sam is also considering another option. If he takes a job at the local grocery store, his starting wage will be $40,000 per year, and he will get a 3% raise, in real terms, each year until he retires at the age of 53. If Sam lives to be 100, what is the equal annual consumption he could enjoy until that date?

Please show step by step work and equations used.


Answers

A1 PV of annuity p/(r-g) (1 (1+g) (1+r)lAn 979748.1454 4 Cost Income Years Income Years Income Years 0.489874073 10 10 100000 10 3% 35 49,900.64 Period 10 12 13 10,07,646.47 51,321.57 PV Annual consumption 16 IA1 PV of annuity p/(r-g) -G4 G5 G/(596-G7) Years 10 40000 0.03 -53-18 --PMT(596, 100-18,G Years 10 period Years 10 12 PV Annual consumption PMT(5%,100-18,C12) 16

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