2. You just graduated from Rotman Commerce and landed a job on Bay Street. Your annual salary is $100,000, and your contract is for 5 years. Your salary will stay the same during the first 5 years (i.e., for year 1 to year 5). If you do well (which we assume will happen with certainty), you will get a permanent contract. Under this contract, your salary will grow at the rate of 3% per year, until retirement (i.e., your salary starts growing in year 6). Retirement will occur exactly 30 years after your contract becomes permanent. For simplicity, we abstract from income taxes and assume that your salary is paid at the end of each year. The discount rate, r, is 4%, annually compounded. (a) What is the present value (as of today) of all your future earnings? (b) You have just found a $800,000 condo that you plan to buy at the end of year 5. At that time, you will have to pay a down payment equal to 20% of the value of the property. Assume that you save 30% of your annual salary in a savings account, which yields a return of 4%, annually compounded. Will you have enough savings to afford the condo assuming that condo prices stay constant? (c) Your calculations in part (b) abstracted from changes in real estate prices. Assume that the expected change in real estate prices is 2%, annually compounded and that you still earn a return of 4% on your savings. Would your conclusion from part (b) change? Show your calculations
2. You just graduated from Rotman Commerce and landed a job on Bay Street. Your annual salary is $100,000, and your contract is for 5 years. Your salary will stay the same during the first 5 years (i.e., for year 1 to year 5). If you do well (which we assume will happen with certainty), you will get a permanent contract. Under this contract, your salary will grow at the rate of 3% per year, until retirement (i.e., your salary starts growing in year 6). Retirement will occur exactly 30 years after your contract becomes permanent. For simplicity, we abstract from income taxes and assume that your salary is paid at the end of each year. The discount rate, r, is 4%, annually compounded. (a) What is the present value (as of today) of all your future earnings? (b) You have just found a $800,000 condo that you plan to buy at the end of year 5. At that time, you will have to pay a down payment equal to 20% of the value of the property. Assume that you save 30% of your annual salary in a savings account, which yields a return of 4%, annually compounded. Will you have enough savings to afford the condo assuming that condo prices stay constant? (c) Your calculations in part (b) abstracted from changes in real estate prices. Assume that the expected change in real estate prices is 2%, annually compounded and that you still earn a return of 4% on your savings. Would your conclusion from part (b) change? Show your calculations
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:2. You just graduated from Rotman Commerce and landed a job on Bay Street. Your annual
salary is $100,000, and your contract is for 5 years. Your salary will stay the same during
the first 5 years (i.e., for year 1 to year 5). If you do well (which we assume will happen
with certainty), you will get a permanent contract. Under this contract, your salary will
grow at the rate of 3% per year, until retirement (i.e., your salary starts growing in year
6). Retirement will occur exactly 30 years after your contract becomes permanent. For
simplicity, we abstract from income taxes and assume that your salary is paid at the end
of each year. The discount rate, r, is 4%, annually compounded.
(a) What is the present value (as of today) of all your future earnings?
(b) You have just found a $800,000 condo that you plan to buy at the end of year 5.
At that time, you will have to pay a down payment equal to 20% of the value of the
property.
Assume that you save 30% of your annual salary in a savings account, which yields a
return of 4%, annually compounded. Will you have enough savings to afford the condo
assuming that condo prices stay constant?
(c) Your calculations in part (b) abstracted from changes in real estate prices. Assume
that the expected change in real estate prices is 2%, annually compounded and that you
still earn a return of 4% on your savings. Would your conclusion from part (b) change?
Show your calculations.
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