Question

14. Your opportunity cost of funds can be expressed as 6% per year, compounded quarterly. Assume now that the internship pays $8,000 per month (paid at the end of the month.) What is the value today of the salary

Answer 1

Answer:

$7,960.4

Explanation:

Here

Yearly rate is 6% which means that quarterly rate would be 1.5% which is one fourth of yearly rate (6% * 1/4).

Monthly internship is $8,000.

Now by using the present value model, we have:

Present Value = Future Value / (1  +  r)^t

Here t will be one third (1/3) as we are calculating the present value of a salary and the rate that we are using is quarterly which means one month is one third of a quarter (1/3).

This Implies that:

Present Value = $8,000 / (1   +  1.5%)^(1/3)

= $7,960.4