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Time Value of money: Present Value

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:
1. A $50,000 cash bonus paid now;
2. A $10,000 annual cash bonus to be paid each year over the next six years, with the first $10,000 paid now.
3. A three-year $22,000 annual cash bonus with the first payment due three years from now.
Requirements:
1. Evaluate the three alternative bonus plans. Sally can earn a 6% annual return on her investments. Which option should she take. Please show all calculations to support your answer.

Solution Preview

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:
1. A $50,000 cash bonus paid now;
2. A $10,000 annual cash bonus to be paid each year over the next six years, with the first $10,000 paid now.
3. A three-year $22,000 annual cash bonus with the first payment due three years from now.
Requirements:
1. Evaluate the three alternative bonus plans. Sally can earn a 6% annual return on her investments. Which option should she take. Please show all calculations to support your answer.

Note: the ...

Solution Summary

Three alternative bonus plans are evaluated by calculating the present value of cash flows.

$2.19