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December 14th, 2011, 10:53 AM   #1
 
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You are approaching your 10-year anniversary of employment, and the company your work for has promised a bonus of $10,000 in two years time if you reach performance targets. In addition, the company has promised you another bonus of $30,000 seven years from today if your high standards of work performance continue. Interest rates are currently 5% and will stay at this level for four years. After four years, interest rates are expected to rise to 8%.
What is the present value of the promised bonuses?


Do I add all the values together or do I simply calculate FV= 10,000 i= 5% n=2
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December 14th, 2011, 02:16 PM   #2
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Re: question

Compute the two future values separately and add them together.
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December 14th, 2011, 09:17 PM   #3
 
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Re: question

For the $10,000 you can just take it as is, using the 5% and 2 periods. The rate doesn't change during this time.

For the $30,000, you need to first find the present value of where it will be in 4 years when the rate changes. That is, you have to "back into" stuff like this. We know it's worth $30,000 in 7 years (FV). 4 years from now is a present value relative to the 7 years. So how many years will it be at 8%? First find the present value it will be at the 4-year mark, at 8%. Then take that value and find the present value of it for the first 4 years at the 5%. Does that make sense?

You can't add the original numbers together as they are two individual things. Whether you'd want to add the answers together I don't know. The wording isn't clear on that point. Unless you're using a template that only has space for one number, I would list them individually.
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December 16th, 2011, 12:55 AM   #4
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Re: question

30000 / (1.05^4 * 1.08^3) = ~19,592.63
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