Exercise 3

You are being asked for a high-level management position. To do this, you require a long-term (12-year) compensation agreement with your employer. You will therefore be remunerated as follows:

• $300,000 at the end of each year (1 to 3)
• $400,000 at the end of each year (4 to 6)
• $450,000 at the end of each year (7 to 9)
• $600,000 at the end of each year (10 to 12)

Calculate the value of payments under this agreement. Payments are made at the end of the year and the discount rate is 5%.