Question

Your boss has just congratulated you on the wonderful job you did this year. In order to formally recognize your achievements, he would like to either give you a bonus, or increase your salary. If you take the bonus, you will receive $5,000 immediately. The salary increase would be a 1.5% addition to the 40,000 per annum you currently receive, payable at each year-end. In either event, you must pay taxes at a rate of 44% and plan to work at this company for the next 10 years. If you can invest any earning at a rate of 7%, which should you choose?

Answer 1

Option 1 )	Bonus
bonus amount	$5,000
Bonus after tax	5000*(1-.44)
	$     2,800.00
Bonus after 10 years =	$2800*1.07^10
	$     5,508.02
Option 2 )	Increment in salary
Amount =	40000*1.5%
	$         600.00
After Tax=	600*(1-.44)
	$         336.00
	1	2	3	4	5
	Year	Opening balance	Amount at the end received	Interest	Closing(2*4)+3
	1	$               -	336	1.07	$     336.00
	2	$     336.00	336	1.07	$     695.52
	3	$     695.52	336	1.07	$ 1,080.21
	4	$ 1,080.21	336	1.07	$ 1,491.82
	5	$ 1,491.82	336	1.07	$ 1,932.25
	6	$ 1,932.25	336	1.07	$ 2,403.51
	7	$ 2,403.51	336	1.07	$ 2,907.75
	8	$ 2,907.75	336	1.07	$ 3,447.29
	9	$ 3,447.29	336	1.07	$ 4,024.60
	10	$ 4,024.60	336	1.07	$ 4,642.33
Amount after 10 years = $4642.33
There fore it is better to receive bonus amount and invest at 7%