You have been offered a job with an unusual bonus structure. As long as you stay...

You have been offered a job with an unusual bonus structure. As long as you stay with the firm, you will get an extra 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 years and the interest rate is (EAR)? (Note: Be careful not to round any intermediate steps less than six decimal places.) The present value of this incentive is $

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Expert Solution

Plan: Draw a timeline to fully understand the timing of the cash flows. Determine the present value of the bonus payments.

Execute:

0	7	14		42


		70,000	70,000		70,000

Because the equivalent discount rate for a 7-year period is 50.363%.

Using the annuity formula

	N	I/Y	PV	PMT	FV	Excel Formula
Given:	6	50.36%		70,000	0
Solve for PV:			(126,964.34)			=PV(0.503630258991361,6,70000,0)

Evaluate: The present value of the bonus payments is $126,964.

ekkarill92 answered 1 year ago

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