Question

Josh ritchey has just been hired as a cost engineer by a large airlines company.​ josh's first idea is to quit giving complimentary​ cocktails, wine, and beer to the international flying public. he calculates this will save 5 comma 100 comma 0005,100,000 drinks per​ year, and each drink costs ​$0.400.40​, for a total of ​$2.042.04 million per year. instead of complimentary​ drinks, josh estimates that the airlines company can sell 2 comma 000 comma 0002,000,000 drinks at ​$4.504.50 per drink. the net savings would amount to ​$11.0411.04 million per​ year! josh's boss really likes the idea and agrees to give josh a lumpsum bonus now equaling 0.140.14​% of the present equivalent worth of threethree years of net savings. if the​ company's marr is 1515​% per​ year, what is​ josh's bonus?

Answer 1

Answer: Josh's bonus is $35,289.53.

In the question above, we need to look at the net savings that will occur from selling drinks instead of giving them as complimentary drinks. So we have,

Net Savings per year = $11.04 million

The company's MARR = 15%

Josh's bonus is 0.14% of the present value of three years' net savings.

Since the quantum of savings is constant each year, we can calculate the present value of these savings by using the Present Value of annuity formula.

$PVA = P * \left [\frac{1-(1+r)^{-n}}{r} \right ]$

$PVA = 11.04 * 2.283225117$

PVA = Present value of three years' net savings = 25.20680529 million

Josh's bonus : 0.14% of present value of three years' net savings.

$Josh's Bonus = 25.20680529 * 0.0014$

Josh's Bonus = $0.035289527 million or $35,289.53.