Question

Sally Hamilton has performed well as the chief financial officer of the Maxtech Computer Company and has earned a bonus. She has a choice among the following three bonus plans: (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) A $50,000 cash bonus paid now. A $10,000 annual cash bonus to be paid each year over the next six years, with the first $10,000 paid now. A three-year $22,000 annual cash bonus with the first payment due three years from now. Required: Evaluate the three alternative bonus plans. Sally can earn a 6% annual return on her investments. (Round your answers to nearest whole dollar amount.) What is the present value of the first alternative

Answer 1

Answer and Explanation:

First alternative Present value;

= $50,000

The $50,000 is to be paid now so this is its present value.

Second alternative;

This is an Annuity due as the first payment is now. The present value is;

= 10,000 * Present Value of Annuity dude factor for 6 years, 6%

= 10,000 * 5.2124

= $52,124

Third alternative;

= 22,000/(1 + 6%)^3 + 22,000/(1 + 6%)^4 + 22,000/(1 + 6%)^5

= $52,337

The third alternative should be chosen as it offers the highest present value.