Question

Joe Masters has received a job offer from a large wine retailer. His base salary will be $136,500. He will receive his first annual salary payment one year from the day he begins work. He will also get an immediate $50,000 bonus for joining the company. His salary will grow at 5 percent each year, starting after the first year. Mr. Masters is expected to work for 15 years. What is the present value of the offer if the discount rate is 7.1 percent?

Answer 1

Present value = [Future Value / (1 + R)^T]

R = Interest rate = 7.1%

T = Time in years

base salary grows at 5% each year starting after the first year. So after year 1, salary grows at Previous salary * (1.05)

Present value of the offer = $50,000 + [$136,500/ (1.071)¹] + [$136,500 * (1.05)¹/(1.071)²] + [$136,500 * (1.05)²/(1.071)³] + [$136,500 * (1.05)³/(1.071)⁴] + [$136,500 * (1.05)⁴/(1.071)⁵] + [$136,500 * (1.05)⁵/(1.071)⁶] + [$136,500 * (1.05)⁶/(1.071)⁷] + [$136,500 * (1.05)⁷/(1.071)⁸] + [$136,500 * (1.05)⁸/(1.071)⁹] + [$136,500 * (1.05)⁹/(1.071)¹⁰] + [$136,500 * (1.05)¹⁰/(1.071)¹¹] + [$136,500 * (1.05)¹¹/(1.071)¹²] + [$136,500 * (1.05)¹²/(1.071)¹³] + [$136,500 * (1.05)¹³/(1.071)¹⁴] + [$136,500 * (1.05)¹⁴/(1.071)¹⁵]

Present value of the offer = $50,000 + $127,450.98 + $124,951.94 + $122,501.90 + $120,099.91 + $117,745.01 + $115,436.28 + $113,172.82 + $110,953.75 + $108,778.18 + $106,645.28 + $104,554.20 + $102,504.11 + $100,494.23 + $98,523.75 + $96,591.91

Present value of the offer = $1,720,404.26

Detailed working in excel.