1) You just signed a business consulting contract with one of your clients. The

Question

1) You just signed a business consulting contract with one of your clients. The client will pay you a series of five annual constant-dollar payments beginning with $60,000 at the end of the first year. The payments will grow at a rate of 6% per year. Assume that the base year is the current year (n=0). If the market interest rate is 10% per year and the general inflation rate is 6% per year, find the present worth of this series of payments, based on: Constant Dollar Analysis {i`~ .0377, Pw ~ 301796.3}ans need work please! Present Analysis. {Pw~253600.81}ans need work please!

Explanation / Answer

1) Constant dollar analysis :

lets first calculate interest rate in actual dollar as follows

i' = i-inflation/ (1+inflation) = 10%-6% / (1+6%) = 3.8% approx = 0.0377

Now use the following formula -

P = A1(P/A,g,i,n)

P = A1(P/A,6%,3.8%,4) where A i s annual amount placed in the account.

Now

P = A1/(0.0377-0.06)[1-((1+0.06)/(1+0.0377))4]

P = 3.980A1

Now again

P = A1(P/A,6%,3.8%,4)

P = 60000(3.980) = $238822.5

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