Magnus, just turned 32, is a freelance web designer. He has just won a design project...

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Magnus, just turned 32, is a freelance web designer. He has just won a design project contract from AAA Inc. that would last for 3 years. The contract offers two different pay packages for Magnus to choose from: Package I: $30,000 paid at the beginning of each month over the three-year period. Package II: $26,000 paid at the beginning of each month over the three years, along with a $200,000 bonus (more commonly known as "gratuity") at the end of the contract. The relevant yearly interest rate is 12.68250301%. a) Which package has higher value today? [Hint: Take a look at the practice questions set IF you have not done so yet!] (14 marks) b) Confirm your decision in part (a) using the Net Present Value (NPV) decision rule. (4 marks) c) Continued from part (a). Suppose Magnus plans to invest the amount of income he accumulated at the end of the project (exactly three years from now) in a retirement savings plan that would provide him with a perpetual stream of fixed yearly payments starting from his 60th birthday. How much will Magnus receive every year from the retirement plan if the relevant yearly interest rate is the same as above (12.68250301%)? (7 marks) Magnus, just turned 32, is a freelance web designer. He has just won a design project contract from AAA Inc. that would last for 3 years. The contract offers two different pay packages for Magnus to choose from: Package I: $30,000 paid at the beginning of each month over the three-year period. Package II: $26,000 paid at the beginning of each month over the three years, along with a $200,000 bonus (more commonly known as "gratuity") at the end of the contract. The relevant yearly interest rate is 12.68250301%. a) Which package has higher value today? [Hint: Take a look at the practice questions set IF you have not done so yet!] (14 marks) b) Confirm your decision in part (a) using the Net Present Value (NPV) decision rule. (4 marks) c) Continued from part (a). Suppose Magnus plans to invest the amount of income he accumulated at the end of the project (exactly three years from now) in a retirement savings plan that would provide him with a perpetual stream of fixed yearly payments starting from his 60th birthday. How much will Magnus receive every year from the retirement plan if the relevant yearly interest rate is the same as above (12.68250301%)? (7 marks)

Answer rating: 100% (QA)

a Package II has a higher value today This is because the bonus of 200000 at the end of the contract has a present value of 16668630 today which is gr... View the full answer