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:

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 $10,000 annual cash bonus to be paid each year for six years, with the first $10,000 paid one year from now.
4. A $65,000 cash bonus paid five years from now.  

Required:
Evaluate the four alternative bonus plans. Sally can earn a 6% annual return on her investments. (Round your answers to nearest whole dollar amount, do NOT include a $ sign in your answer.)  

1. What is the present value of the first alternative?

2. What is the present value of the second alternative?

3. What is the present value of the third alternative?

4. What is the present value of the fourth alternative?

5. Which bonus plan should Sally choose? Enter the number 1, 2, 3, or 4 for your answer. 1 is for the 1st alternative, 2 for the 2nd alternative, 3 for the 3rd alternative and 4 is for the 4th alternative.

Answer 1

Option-1

PV of Cash Bonus Paid Now= $50000

Option-2
Annual Cash Bonus	10000
PVAF @ 6% for 0-5	5.21236
Present Value of Annual Cash Bonus (10000*5.21236)	52123.6
Option-3
Annual Cash Bonus	10000
PVAF @ 6% for 1-6	4.9173
Present Value of Annual Cash Bonus (10000*4.9173)	49173
Option-4
Cash Bonus paid five year from now	65000
PVIF @ 6% at end of 5 year	0.74726
Present Value of Cash Bonus (65000*0.74726)	48571.9