Posted by Anna on .
I am trying to figure out how to do this problem:
scenarios (projected $90,000 annual cash inflow vs. projected $70,000 annual cash inflow). Note, 5 years of $90,000 per year equals $450,000 of total cash received over the duration of the project ($350,000 for 2nd project). But, due to the time value of money (i.e. inflation) that $450,000 cash received is not worth that amount in today's dollars.
You first need to determine what the PV of the cash inflows are for each of the two projects. Then, you need to determine the Net Present Value of that project (PV Cash Inflows - Cost of Investment). Once you have the NPV of the two projects AND what actually occurred, then use the bonus structure of the company to calculate the manager's bonus for each of the two projects: (NPV Actual - NPV Project #1) * 10%.