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After earning an MBA, a student begins working on an $80,000 per year job on 9/1/18. She expects to receive a 5 percent raise each year until she retires on 9/1/48. If the cost of capital is 8% per year and she is paid monthly, determine the total present value of her before tax earnings. Assume she is paid at the end of each month and each annual raise takes effect on Sept 1 each year.

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jepessoa

Answer:

since there is not enough room here, I prepared a long excel spreadsheet to calculate the present value of her monthly salaries.    

her initial monthly salary is $6,666.67, total salaries earned = 12 salaries x 30 years = 360 salaries

the discount rate = 8% / 12 = 0.667% or 0.00667

the present value of the salaries earned during 30 years = $1,520,375.10

Explanation:

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