Say you are planning to start a new business. You expect to have losses for the first 2 years and then achieve significant profi
1 answer:
You might be interested in
Answer:$69,030
The employee can decide to receive a single amount of $69,030 at the employment date.
Explanation:
The time value of money is the idea that money is worth more now, than the same amount a year or five years from now. You can buy more with $10,000 today than you will be able to in 2021 or 2025.
The formula for calculating the present value of money is
or
Where PV is the present value
FV is the future value ($10,000)
r is the time value of money (9% or 0.09) and
n is the number of periods (2025 to 2029).
In this question,
2021 is period 0. In 2021, the employee receives 39,000. This is the <u>present value</u> = 39000
2022 is period 1
2023 is period 2
2024 is period 3
2025 is period 4. In 2025, the employee will receive 10,000 so the present value, PV =
PV=10000 * 0.708 = 7080
2026 is period 5. In 2026, the employee will receive 10,000 so the present value, PV =
PV=10000 * 0.650 = 6500
2027 is period 6. In 2027, the employee will receive 10,000 so the present value, PV =
PV=10000 * 0.596 = 5960
2028 is period 7. In 2028, the employee will receive 10,000 so the present value, PV =
PV=10000 * 0.547 = 5470
2029 is period 8. In 2029, the employee will receive 10,000 so the present value, PV =
PV=10000 * 0.502 = 5020
In total, the present value = (39000 + 7080 + 6500 + 5960 + 5470 + 5020)
=69,030
The employee can decide to receive a single amount of $69030 at the employment date.
(You can also look up the values in a discount table and multiply them by the present value. Note that the first payment of $10,000 is in period 4, not 5. This is because 2021 is period 0)