Joe Masters has received a job offer from a large wine retailer. His base salary

Question

Joe Masters has received a job offer from a large wine retailer. His base salary

will be $125,000. He will receive his first annual salary payment one year from

the day he begins work. He will also get an immediate $50,000 bonus for joining

the company. His salary will grow at 5 percent each year, starting after the first

year. Each year he will also receive a bonus equal to 8 percent of his salary. Mr.

Masters is expected to work for 15 years. What is the present value of the offer if

the discount rate is 7 percent?

Explanation / Answer

Annual income = Annual salary + Annual bonus

Annual salary, year N = Annual salary, year (N - 1) x 1.05

Annual bonus, year N = Annual salary, year N x 8%

Present Value is computed as follows. Note that PV Factor in year N = (1.07)-N

Year Salary ($) Bonus ($) Income ($) PV factor @7% Discounted Income ($) (A) (B) (C)=(A)+(B) (D) (C)x(D) 0 0 50,000 50,000 1.0000 50,000.00 1 1,25,000.00 1,35,000.00 2,60,000.00 0.9346 2,42,990.65 2 1,31,250.00 1,41,750.00 2,73,000.00 0.8734 2,38,448.77 3 1,37,812.50 1,48,837.50 2,86,650.00 0.8163 2,33,991.79 4 1,44,703.13 1,56,279.38 3,00,982.50 0.7629 2,29,618.11 5 1,51,938.28 1,64,093.34 3,16,031.63 0.7130 2,25,326.18 6 1,59,535.20 1,72,298.01 3,31,833.21 0.6663 2,21,114.48 7 1,67,511.96 1,80,912.91 3,48,424.87 0.6227 2,16,981.50 8 1,75,887.55 1,89,958.56 3,65,846.11 0.5820 2,12,925.77 9 1,84,681.93 1,99,456.48 3,84,138.42 0.5439 2,08,945.85 10 1,93,916.03 2,09,429.31 4,03,345.34 0.5083 2,05,040.32 11 2,03,611.83 2,19,900.77 4,23,512.60 0.4751 2,01,207.79 12 2,13,792.42 2,30,895.81 4,44,688.23 0.4440 1,97,446.89 13 2,24,482.04 2,42,440.60 4,66,922.64 0.4150 1,93,756.30 14 2,35,706.14 2,54,562.63 4,90,268.78 0.3878 1,90,134.68 15 2,47,491.45 2,67,290.77 5,14,782.22 0.3624 1,86,580.77 Present Value ($) = 32,54,509.83

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