Sally Hamilton has performed well as chief financial officer of the Maxtech Comp

Question

Sally Hamilton has performed well as chief financial officer of the Maxtech Computer Company and has earned a bonus. She has a choice among the followig three bonus plans: 1.A $50,000 cash bonus paid now. 2.A $10,000 annual cash bonus to be paid each year over the next six years, with the first $10,000 paid now. 3.A three-year $22,000 annual cah bonus with the first payment due three years from now. Sally can earn a 6% annual return on her investments. Evaluate the three alternative bonus plans, posting your questions and insights for the class.

Explanation / Answer

The 3 bonus plans of Sally Hamilton has to be done using the Net Present Value method. Higher the NPV out of the three options Sally should opt for that. Annual ROI is 6%.

Option 1: $ 50,000 cash bonus paid now.. NPV = $ 50,000

Option 2 : $10,000 annual cash bonus to be paid each year over the next six years, with the first $10,000 paid now

Option 3 : A three-year $22,000 annual cah bonus with the first payment due three years from now

So Sally should opt for Option 3.

Year Bonus payment 0           10,000.00 1           10,000.00 2           10,000.00 3           10,000.00 4           10,000.00 5           10,000.00 NPV ( Y1 to Y5) $42,123.64 Add paid in Y0 $10,000 Total $52,123.64

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