Note: Correct answer to calculations-based questions will only be awarded full mark if clearly stated numerical formula (including the left-hand side of the equation) is provided. Correct answer without calculations support will only receive a tiny fraction of mark assigned for the question.

Question 1 (25 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!] (14marks)

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)