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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.

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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