Question

You are thinking about changing employment. Your goal is to work for three years and then return to university full-time, in pursuit of an advanced degree. A potential employer just offered you an annual salary of R55 000, R60 000, and R65 000 a year for the next three years, respectively. All salary payments will be made as lump sum payments at the end of each year. The offer also includes a starting bonus of R4 500, payable immediately. What is this offer worth to you today, at a discount rate of 8,25%?

Answer 1

Explanation:

To determine the value of the offer today, we need to calculate the present value of all the cash flows using a discount rate of 8.25%.

First, let's calculate the present value of the salary payments.

PV(year 1 salary) = R55 000 / (1 + 0.0825)^1 = R50 760.87

PV(year 2 salary) = R60 000 / (1 + 0.0825)^2 = R51 423.95

PV(year 3 salary) = R65 000 / (1 + 0.0825)^3 = R52 110.69

Next, let's calculate the present value of the starting bonus.

PV(starting bonus) = R4 500 / (1 + 0.0825)^0 = R4 500

Finally, we can add up all the present values to find the total present value of the offer:

PV(total offer) = PV(year 1 salary) + PV(year 2 salary) + PV(year 3 salary) + PV(starting bonus)

PV(total offer) = R50 760.87 + R51 423.95 + R52 110.69 + R4 500

PV(total offer) = R158 795.51

Therefore, the offer is worth R158 795.51 to you today at a discount rate of 8.25%.

Answer 2

55K+60K+65K=184K

100% - 8.25%=91.75%

184000x91.75%=168820

Ans:168K