SHORT ANSWER. Write your answers in the spaces provided or on extra blank paper
ID: 2408760 • Letter: S
Question
SHORT ANSWER. Write your answers in the spaces provided or on extra blank paper (available at the front of class). Showing your work is always a good idea for partial credit. 31. Your friend, Nick, received a job offer to manage the marketing campaign of a retail company over the next five years. packages (described below). Nick accepted the job offer and starts tomorrow. Since he hasn't The company offered Nick two different compensation taken ACTG11, he needs your help deciding which compensation package to select. Compensation Package A: Nick will receive a payment of $1,000,000 at the end of the fifth year. Compensation Package B: Nick will receive a signing bonus of $100,000 immediately, and five payments of $150,000, where one payment is made at the end of each of the next 5 years . Assume the annual interest rate is 9%, which compensation package should Nick choose, and why? Show the work that led to your recommendation (simply writing Compensation Package X will earn very few points). 20 points.Explanation / Answer
Nick should choose the compensation package on the basis of its present value
1. Present Value of Compensation Package A
= $1000000 * Present Value factor @ 9% for 5th year
= $1000000 * 0.649931386
= $ 649931.386
2. Present Value of Compensation Package B
Looking at the present value of both the packages, it is advisable that Nick should choose Compensation Package B as it has higher present value compared to Package A.
Year Cash Inflows (in $) Present Value Factor @9% Present Value (in $) 0 100000 1 100000 1 150000 0.9174 137610 2 150000 0.8417 126255 3 150000 0.7722 115830 4 150000 0.7084 106260 5 150000 0.6499 97485 Net Present Value 683440Related Questions
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