Question

A company is offering a bonus plan to its employees. the company will set aside 1% of sales as a bonus. the first year sales are expected to be 5,000,000 and increase 20 % per year . at an interest rate of 10 % what is the present value of this bonus over a 5 year period of time

Answer 1

Calculating Sales Amount:

1st Year Sales = $5,000,000

Every the sales were increased by 20%

2nd Year Sales = $5,000,000 + ($5,000,000*20%)

= $6,000,000

3rd Year Sales = $6,000,000 + ($6,000,000 * 20%)

= $7,200,000

4th Year Sales = $7,200,000 + ($7,200,000 *20%)

= $8,640,000

5th Year Sales = $8,640,000 + ($8,640,000 *20%)

= $10,368,000

Calculating Bonus Amount:

1st Year Bonus Amount = $5,000,000 * 1%

= $50,000

2nd Year Bonus Amount = $6,000,000 * 1%

= $60,000

3rd Year Bonus Amount = $7,200,000 * 1%

= $72,000

4th Year Bonus Amount = $8,640,000 * 1%

= $86,400

5th Year Bonus Amount = $10,368,000 * 1%

= $103,680

Year Bonus Amount Present Value Factor 10% Present Values

1 $50,000 0.909 $45,450

2 $60,000 0.826 $49,560

3 $72,000 0.751 $54,072

4 $86,400 0.683 $59,011.20

5 $103,680 0.621 $64,385.28

PresentValue $272,478.48