A "little seven" accounting firm offers to pay you a year-end bonus of $5,000 for 3 years if you will accept employment with them and stay for the entire 3-year period. Which of the following amounts is closest to the present value of the bonus if the interest rate is 10%?

Question

Quizplus · Accepted Answer

The present value of the bonus is $12,434. This is calculated by taking the present value of each of the three $5,000 payments, which is $4,145, $3,768, and $3,521, respectively. The present value of each payment is calculated by dividing the payment by (1 + r)^n, where r is the interest rate and n is the number of years until the payment is received.

A "Little Seven" Accounting Firm Offers to Pay You a Year-End