Question

Chris recently graduated in engineering. Her employer will give her a raise of $6500 per year if she passes the Fundamentals of Engineering (FE) exam.

1. Over a career of 35 years, what is the present worth of the raise if the interest rate is 6%?
2. What is the future worth at year 35?

Answer 1

Answer

Assumption: The raise is received at the end of each year.

Part a) Present Worth of the raise:

P = PMT x [1 – (1 + r) -n] / r

The variables in the equation represent the following:

• P = the present value of annuity
• PMT = the amount in each annuity payment (in dollars)
• R= the interest or discount rate
• n= the number of payments left to receive

Thus, P = 6500* [ 1 - (1.06)-35 ] / 0.06

P = $ 108,333

Part b) Future Worth at year 35:

FV = PMT x [ (1 + r) n -1 ] / r

The variables in the equation represent the following:

• FV = the future value of annuity
• PMT = the amount in each annuity payment (in dollars)
• R= the interest or discount rate
• n= the number of payments left to receive

Thus, FV = 6500* [(1.06)35  -1] / 0.06

= $ 724,326