Question

Kathleen just received a bonus from EG. She is excited because her dad started his career with EG. If her bonus of $300,000 is equivalent to the bonus paid to her dad 10 years ago, how much was her dad’s bonus? Assume that the average annual inflation rate was 3.8%. (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.)

Answer 1

Answer:

$206,608.28

Explanation:

in order to determine how much is Kathleen's bonus worth in equivalent dollars 10 years ago, we need to use the present value formula:

• present value = ?
• future value = $300,000
• n = 10
• r = 3.8%

present value = future value / (1 + r)ⁿ = $300,000 / (1 + 0.038)¹⁰ = $300,000 / 1.452 = $206,608.28

If her dad's bonus was equivalent to hers, then it should have been around $206,608.28.

Answer 2

Answer:

=$206,608.28

Explanation:

Inflation erodes the value of money,  so to determine the real value of any given amount (nominal) we need to adjust it for infalton.

In the same vein, to calculate her dad's bonus 10 years ago,  we will have to determine the real value of $300, 000 using the annual  inflation rate.

This is determined as follows:

Real bonus = 300,000/1.038

                   =  $206,608.28

The value of her dad's bonus 10 years ago

                  =$206,608.28