5. Joe Masters has received a job offer from a large wine retailer. His base sal
ID: 2817892 • Letter: 5
Question
5. 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
Computation of annual payments:
Year
Annual base salary (A)
Bonus (B = A x 0.08)
Total annual payment (A + B)
1
$ 125,000.00
$ 10,000.00
$ 135,000.00
2
$ 131,250.00
$ 10,500.00
$ 141,750.00
3
$ 137,812.50
$ 11,025.00
$ 148,837.50
4
$ 144,703.13
$ 11,576.25
$ 156,279.38
5
$ 151,938.28
$ 12,155.06
$ 164,093.34
6
$ 159,535.20
$ 12,762.82
$ 172,298.01
7
$ 167,511.96
$ 13,400.96
$ 180,912.91
8
$ 175,887.55
$ 14,071.00
$ 189,958.56
9
$ 184,681.93
$ 14,774.55
$ 199,456.48
10
$ 193,916.03
$ 15,513.28
$ 209,429.31
11
$ 203,611.83
$ 16,288.95
$ 219,900.77
12
$ 213,792.42
$ 17,103.39
$ 230,895.81
13
$ 224,482.04
$ 17,958.56
$ 242,440.60
14
$ 235,706.14
$ 18,856.49
$ 254,562.63
15
$ 247,491.45
$ 19,799.32
$ 267,290.77
Base salary for year 2 = base salary year 1 x 1.05 = $ 125,000 x 1.05 = $ 131,250
Base salary for year 3 = base salary year 2 x 1.05 = $ 131,250 x 1.05 = $ 137,812.50 and so on…
Computation of PV of 15 year offer:
Year
Annual payment (C)
PV Factor calculation
PV factor @ 7 % (F)
PV
(C x F)
0
$50,000.00
1/(1+7%)^0
1
$50,000.00
1
$135,000.00
1/(1+7%)^1
0.934579439
$126,168.22
2
$141,750.00
1/(1+7%)^2
0.873438728
$123,809.94
3
$148,837.50
1/(1+7%)^3
0.816297877
$121,495.74
4
$156,279.38
1/(1+7%)^4
0.762895212
$119,224.79
5
$164,093.34
1/(1+7%)^5
0.712986179
$116,996.29
6
$172,298.01
1/(1+7%)^6
0.666342224
$114,809.44
7
$180,912.91
1/(1+7%)^7
0.622749742
$112,663.47
8
$189,958.56
1/(1+7%)^8
0.582009105
$110,557.61
9
$199,456.48
1/(1+7%)^9
0.543933743
$108,491.11
10
$209,429.31
1/(1+7%)^10
0.508349292
$106,463.24
11
$219,900.77
1/(1+7%)^11
0.475092796
$104,473.27
12
$230,895.81
1/(1+7%)^12
0.444011959
$102,520.50
13
$242,440.60
1/(1+7%)^13
0.414964448
$100,604.23
14
$254,562.63
1/(1+7%)^14
0.387817241
$98,723.78
15
$267,290.77
1/(1+7%)^15
0.36244602
$96,878.47
TPV
$1,713,880.10
Present value of the offer discounted at 7 % is $ 1,713,880.10
Year
Annual base salary (A)
Bonus (B = A x 0.08)
Total annual payment (A + B)
1
$ 125,000.00
$ 10,000.00
$ 135,000.00
2
$ 131,250.00
$ 10,500.00
$ 141,750.00
3
$ 137,812.50
$ 11,025.00
$ 148,837.50
4
$ 144,703.13
$ 11,576.25
$ 156,279.38
5
$ 151,938.28
$ 12,155.06
$ 164,093.34
6
$ 159,535.20
$ 12,762.82
$ 172,298.01
7
$ 167,511.96
$ 13,400.96
$ 180,912.91
8
$ 175,887.55
$ 14,071.00
$ 189,958.56
9
$ 184,681.93
$ 14,774.55
$ 199,456.48
10
$ 193,916.03
$ 15,513.28
$ 209,429.31
11
$ 203,611.83
$ 16,288.95
$ 219,900.77
12
$ 213,792.42
$ 17,103.39
$ 230,895.81
13
$ 224,482.04
$ 17,958.56
$ 242,440.60
14
$ 235,706.14
$ 18,856.49
$ 254,562.63
15
$ 247,491.45
$ 19,799.32
$ 267,290.77
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