Question

You have been offered a job with an unusual bonus structure. As long as you stay with the​ firm, you will get an extra $72,000 every seven​ years, starting seven years from now. What is the present value of this incentive if you plan to work for the company for 42 years and the interest rate is 6.2%

​(EAR)? ​(Note: Be careful not to round any intermediate steps less than six decimal​ places.)

Answer 1

- Bonus will be received every 7 years for 42 years working in firm with first bonus to be 7 years from now which is $72,000

We will calculate its Present Value by taking 7 years as 1 period and forthat first we will calculating 7-year effective Interest rate.

7-year effective Interest rate = (1+EAR)^7 - 1

7-year effective Interest rate = (1+0.062)^7 - 1

7-year effective Interest rate = 1.52360229167 - 1

7-year effective Interest rate = 52.360230%

Now, Calculating the Present Value of Bonus Incentive:-

Where, C= Periodic Bonus  = $72,000

r = Periodic Interest rate = 52.360230%

n= no of periods = 42 years/7 years = 6

Present Value = $126,516.32

So, the present value of this incentive is $126,516.32

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