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2 July, 14:29

Under the terms of his salary agreement, president Steve Walters has an option of receiving either an immediate bonus of $71,500, or a deferred bonus of $91,000 payable in 10 years. Click here to view factor tables Ignoring tax considerations and assuming a relevant interest rate of 4%, which form of settlement should Walters accept?

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  1. 2 July, 14:36
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    Answer: Walters should accept the immediate bonus of $71,500. See explanation below.

    Explanation: In order to determine the better form of settlement, we will have to calculate the present value of $91,000 payable in 10 years, at a 4% interest rate and compare the answer with $71,500.

    The formula for calculating present value (PV) is given as:

    PV = C / (1 + r) ^n

    Where;

    C = amount of money payable ($91,000)

    r = percentage interest rate (4%)

    n = number of years (10 years)

    PV = 91,000 / (1 + 0.04) ^10

    PV = 91,000 / (1.04) ^10

    PV = 91,000/1.48

    PV = 61,486.486

    Therefore, the present value of $91,000 payable in 10 years at a 4% interest rate is approximately $61,486.50. This value is lesser than $71,500.

    Hence, the form of settlement that Walters should accept is an immediate bonus of $71,500.
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