George Anders has just been offered a job at $65,000 per year, with the first payment made one year from today. He anticipates his salary will grow by 2% per year until his retirement in 40 years. Given an interest rate of 10%, calculate the present value of his lifetime salary. (Enter a positive value and round to 2 decimals)

$775,100

Explanation:

A fix Payment for a specified period of time is called annuity. The discounting of these payment on a specified rate is known as present value of annuity.

In this question a fix payment of $65,000 is being made as salary which will grow by 2% and Required interest rate will be 10%. The effective interest rate for this payment is 8% ( 10% - 2%).

The present value of salary can be calculated as follow

PV of annuity = P x [ ( 1- ( 1+ r )^-n ) / r ]

Present value of Salary = $65,000 x [ ( 1- ( 1 + 8% )^-40 ) / 8% ]

Present value of Salary = $65,000 x [ ( 1- ( 1.08 )^-40 ) / 0.08 ]

Present value of Salary = $775,100

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