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24 September, 22:56

Under the terms of his salary agreement, president Steve Walters has an option of receiving either an immediate bonus of $77,000, or a deferred bonus of $98,000 payable in 10 years.

Ignoring tax considerations and assuming a relevant interest rate of 4%, which form of settlement should Walters accept?

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  1. 24 September, 23:11
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    Immediate bonus of $77,000

    Explanation:

    Given the following

    Immediate bonus = $77,000

    Differed bonus = $98,000

    Rate = 4%

    Duration = 10

    $66,205 deferred bonus

    $77,000 immediate bonus

    Calculating the differed bonus

    We have

    =$98,000 x 0.67556 = $66,205

    Present value of deferred bonus

    = $66,205

    He has a choice of collecting either an immediate bonus of $77,000, or collect a deferred bonus of $66,205 payable in 10 years

    The best option for Walters is to collect an immediate bonus now
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