Question

Assume your employer offers a bonus of $7200. The only catch is that you must wait 6 years to take possession of the money. If you can earn 6% on your savings, what is the minimum you would take today in order to match the bonus

Answer 1

Answer:

The minimum would be the present value of the bonus, which is 5,075.72 dollars

Explanation:

we have to discount the 7,200 dollar bonus at 6% discount rate for 6 years to get the present value of the bonus:

$\frac{Maturity}{(1 + rate)^{time} } = PV$  

Maturity  7,200

time  6 years

rate  6% = 6/100 = 0.06

$\frac{7200}{(1 + 0.06)^{6} } = PV$  

PV   $ 5,075.7159