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Suppose you are offered a job contract that specifies that you will work for 5 years and receive payment upon completion of the job.

Suppose you are offered a job contract that specifies that you will work for 5 years and receive payment upon completion of the job. The firm allows you to negotiate the compensation mechanism, but not the length of the contract.

1. if the nominal interest rate is 10%, compute the annuity value of job A that makes you indifferent between receiving 250 000 at the end of 5 years or an annuity value.
2. what is the annuity value if the inflation rate is 4%?

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529088_ECO.xls

Solution 1
Period
Annuity
Interest Rate Amount at the year end
1
37,800
10%
41,580 Amount of Annuity $37800 found from trial and error and it is assumed that the annuity is received at the end of...

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