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Thread: Discounting Question

  1. #1

    Discounting Question

    Hello - my colleague has asked me to calculate the following and I'm a little confused. Assume the following: a consultant will be paid 10% of a net annual fee multiplied by the term of the contract, discounted at 5% per year. The facts are as follows:

    Net Annual Fee = $300,000
    Term of Contract = 5 years

    What would the year 1-5 payments be to the consultant using that formula? What formula is used to solve?

    Thanks!

  2. #2
    Elite Member
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    Quote Originally Posted by sc61487 View Post
    Hello - my colleague has asked me to calculate the following and I'm a little confused. Assume the following: a consultant will be paid 10% of a net annual fee multiplied by the term of the contract, discounted at 5% per year. The facts are as follows:

    Net Annual Fee = $300,000
    Term of Contract = 5 years

    What would the year 1-5 payments be to the consultant using that formula? What formula is used to solve?

    Thanks!
    What are your thoughts? What have you done so far? Please show us your work even if you feel that it is wrong so we may try to help you. You might also read
    http://www.freemathhelp.com/forum/th...Before-Posting

    Hints:
    paid 10% of a net annual fee of $300,000 = ?
    multiplied by the term of the contract which is 5 = ?
    all discounted at 5% per year which is a discount of
    ? for the first year
    an additional ? for the second year
    ...
    an additional ? for the 5th year

    -Ishuda

  3. #3
    Quote Originally Posted by Ishuda View Post
    What are your thoughts? What have you done so far? Please show us your work even if you feel that it is wrong so we may try to help you. You might also read
    http://www.freemathhelp.com/forum/th...Before-Posting

    Hints:
    paid 10% of a net annual fee of $300,000 = ?
    multiplied by the term of the contract which is 5 = ?
    all discounted at 5% per year which is a discount of
    ? for the first year
    an additional ? for the second year
    ...
    an additional ? for the 5th year
    $300,000 x 10% = $30,000
    $30,000 x 5 = $150,000
    Discounted at $1500 year 1, or $28,500 fee
    Discounted at $1425 year 2, or $27,075 fee
    Discounted at $1353 year 3, or $25,722 fee
    Discounted at $1286 year 4, or $24,436 fee
    Discounted at $1221 year 5, or $23,215 fee

    Is it appropriate to discount the 5% each year on the previous years fee?

  4. #4
    Elite Member
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    Quote Originally Posted by sc61487 View Post
    $300,000 x 10% = $30,000
    $30,000 x 5 = $150,000
    Discounted at $1500 year 1, or $28,500 fee
    Discounted at $1425 year 2, or $27,075 fee
    Discounted at $1353 year 3, or $25,722 fee
    Discounted at $1286 year 4, or $24,436 fee
    Discounted at $1221 year 5, or $23,215 fee

    Is it appropriate to discount the 5% each year on the previous years fee?
    I would think it might be read several ways and something I would want clairified. One way it what you have. Another possible reading is 'a single discount of 5% of the total fee each year' which would be a discount of $1500 a year. And still another is 'a discount of 5% of the first year fee for each year' which would be $1500 the first year, $3000 the second year, $4500 the third year...

    -Ishuda

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