You have just signed a 5-year contract with the ABB Group, a world-famous Engineering Consulting firm....

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You have just signed a 5-year contract with the ABB Group, aworld-famous Engineering Consulting firm. Your compensationincludes a $10,000 signing bonus payable today and monthly paymentsof $6000 at end of the month and an additional $10,000 completionbonus at the end of year 5. Your salary and bonuses are invested ina savings account that pays 4% compounded monthly.
a) What is the present value of thiscontract?
b) You plan to put both the signingbonus and the completion bonus into a separate savings account(also paying 4% compounded monthly) and use them for a down-payment on your first house in five years. At the end of five yearsyou hope to have accumulated $40,000 for the down-payment, how muchadditional cash must you put into the separate savings account eachmonth to reach your goal?
c) You found a house that sells for$321,000, put down your $40,000 as a down-pay- ment, and secured amortgage for the remaining balance. If your mortgage has 20 yearsof amortization and a quoted mortgage rate of 6% with semi-annualcom- pounding, what is your monthly payment?
d) Suppose your friend signed a 5-yearcontract with another firm. His compensation includes no paymentsin the first year of the contract and monthly payments at end ofeach month starting from the second year. His first monthly paymentis $10,000 and it grows by 2% (APR compounded monthly) every yearuntil the end of year 5. What is present value of his contractgiven the same savings interest rate? Does he earn more than you?

Answer & Explanation Solved by verified expert

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aPresent Value of contractRateMonthly Interest rate41203333NperNumber of months51260PmtMonthly payment6000FvFuture Paymentcompletion bonus10000PVPresentValue of Monthly payments and Completion Bonus333984Using PV function of excel with See Answer

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Transcribed Image Text

You have just signed a 5-year contract with the ABB Group, aworld-famous Engineering Consulting firm. Your compensationincludes a $10,000 signing bonus payable today and monthly paymentsof $6000 at end of the month and an additional $10,000 completionbonus at the end of year 5. Your salary and bonuses are invested ina savings account that pays 4% compounded monthly.a) What is the present value of thiscontract? b) You plan to put both the signingbonus and the completion bonus into a separate savings account(also paying 4% compounded monthly) and use them for a down-payment on your first house in five years. At the end of five yearsyou hope to have accumulated $40,000 for the down-payment, how muchadditional cash must you put into the separate savings account eachmonth to reach your goal? c) You found a house that sells for$321,000, put down your $40,000 as a down-pay- ment, and secured amortgage for the remaining balance. If your mortgage has 20 yearsof amortization and a quoted mortgage rate of 6% with semi-annualcom- pounding, what is your monthly payment? d) Suppose your friend signed a 5-yearcontract with another firm. His compensation includes no paymentsin the first year of the contract and monthly payments at end ofeach month starting from the second year. His first monthly paymentis $10,000 and it grows by 2% (APR compounded monthly) every yearuntil the end of year 5. What is present value of his contractgiven the same savings interest rate? Does he earn more than you?