Many academic institutions offer a sabbatical policy. Every seventh year a professor is given a year free of teaching and other administrative responsibilities at full pay. For a professor earning $70,000 per year who works for a total of 42 years, what is the present value of the amount she will earn while on sabbatical if the interest rate is 6% (EAR)? Note: Assume that the sabbatical annual salary is paid in one lump sum every 7 years.

$1,26,964.34

Explanation:

As per the given question the solution of present value is provided below:-

To find out the present value first we need to calculate the interest rate

Interest rate                  6%  

Number of Years           7  

Employment years          42  

Number of sabbaticals    6 NPER

(7 year - 1 year)

Interest rate periodic       0.503630259 RATE  (=1.06^7-1)

Salary                               70000  PMT

Present value                   $1,26,964.34 =PV(rate,nper,Pmt)

To reach at present value we simply put the values into formula.

For more clarification please find the screenshot as attached.

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