Question

ACME Industries has offered you the following package: a $25000 signing bonus paid to you two years from now and a five year contract with a starting salary of $75000 per year with 3% annual raises in each subsequent year if you agree to start at ACME three years from now. Let the interest rate be 4%. Draw the cash flow for this problem and find the present worth of this offer.

Answer 1

Answer:

Cash flow diagram

where 77250=75000(1+3%)

79567.5=77250(1+3%)

81954.5=79567.5(1+3%)

84413.1=81954.5 (1+3%)

Present worth of this offer =$25000(P/F,4%,2)+$75000(P/F,4%,3)+$77250(P/F,4%,4)+$79567.5(P/F,4%,5)+$81954.5(P/F,4%,6)+$84413.1(P/F,4%,7)

=$25000(.9246)+75000(.8890)+77250(.8548)+79567.5(.8219)+81954.5(.7903)+84413.1(.7599)

=$23115+66675+66033.3+65396.5+64768.6+64145.5=$350133.9.