Your boss has just congratulat
Your boss has just congratulated youon the wonderful job you did this year. In order to formallyrecognize your achievements, he would like to either give you abonus, or increase your salary. If you take the bonus, you willreceive $5,000 immediately. The salary increase would be a 1.5%addition to the 40,000 per annum you currently receive, payable ateach year-end. In either event, you must pay taxes at a rate of 44%and plan to work at this company for the next 10 years. If you caninvest any earning at a rate of 7%, which should you choose?
Answer:
| Option 1 ) | Bonus | ||||
| bonus amount | $5,000 | ||||
| Bonus after tax | 5000*(1-.44) | ||||
| $ 2,800.00 | |||||
| Bonus after 10 years = | $2800*1.07^10 | ||||
| $ 5,508.02 | |||||
| Option 2 ) | Increment in salary | ||||
| Amount = | 40000*1.5% | ||||
| $ 600.00 | |||||
| After Tax= | 600*(1-.44) | ||||
| $ 336.00 | |||||
| 1 | 2 | 3 | 4 | 5 | |
| Year | Opening balance | Amount at the end received | Interest | Closing(2*4)+3 | |
| 1 | $ – | 336 | 1.07 | $ 336.00 | |
| 2 | $ 336.00 | 336 | 1.07 | $ 695.52 | |
| 3 | $ 695.52 | 336 | 1.07 | $ 1,080.21 | |
| 4 | $ 1,080.21 | 336 | 1.07 | $ 1,491.82 | |
| 5 | $ 1,491.82 | 336 | 1.07 | $ 1,932.25 | |
| 6 | $ 1,932.25 | 336 | 1.07 | $ 2,403.51 | |
| 7 | $ 2,403.51 | 336 | 1.07 | $ 2,907.75 | |
| 8 | $ 2,907.75 | 336 | 1.07 | $ 3,447.29 | |
| 9 | $ 3,447.29 | 336 | 1.07 | $ 4,024.60 | |
| 10 | $ 4,024.60 | 336 | 1.07 | $4,642.33 | |
| Amount after 10 years =$4642.33 | |||||
| There fore it is better to receivebonus amount and invest at 7% |
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