B) Immediate Bonus= 40,000
Deferred Bonus= 70,000 payable in 10 yrs, relevant interest rate is 8%.. (ignore tax considerations)
Which form of settlement should be accepted
70,000/10=7000 per yr
7000*.08=560
7000-560=6640
6640*10=66400 Is that right?
present value = 40000 + 70000(1.08)^-10
= 40000 + 32423.54
= 72423.54
Are you not familiar with the basic formulas for compound interest?
If the present value of a cash flow at an annual rate of interest of 9% is $70000, what is the yearly cash flow? Assume that interest is compounded annually and round to the nearest cent.
To determine which form of settlement is more beneficial, we need to compare the present value of the deferred bonus to the immediate bonus. The present value takes into account the time value of money, which means that receiving money earlier is usually preferred due to its potential to be invested and earn interest.
To calculate the present value of the deferred bonus, we can use the formula for present value of an annuity:
PV = PMT * (1 - (1 + r)^(-n)) / r
Where:
PV = Present value
PMT = Annual payment
r = Interest rate
n = Number of periods
In this case, the PMT is $7,000, the interest rate is 8%, and the number of periods is 10 years. Plugging these values into the formula:
PV = $7,000 * (1 - (1 + 0.08)^(-10)) / 0.08
Calculating this:
PV = $7,000 * (1 - (1.08)^(-10)) / 0.08
PV ≈ $48,346.21
So, the present value of the deferred bonus is approximately $48,346.21.
Comparing this to the immediate bonus of $40,000, we can see that the present value of the deferred bonus is greater. Therefore, accepting the deferred bonus would be more advantageous in terms of the monetary value.