A business is deciding whether to give an end-of-year bonus of $5000 each year for the next four years to an employee,in order to increase the number of sales that employee makes.What is the minimum extra profit the employee must generate this year for the bonus to be worthwhile over the next four years,if the discount rate is 7%?
A)$12,263
B)$14,480
C)$16,936
D)$20,000
E)$18,600

Question

Quizplus · Accepted Answer

The present value of the bonuses over four years must be calculated using the formula for the present value of an annuity. The present value of $5000 per year for four years at a 7% discount rate is approximately $16,936. Therefore, the employee must generate at least this amount in extra profit for the bonus to be worthwhile.

A Business Is Deciding Whether to Give an End-Of-Year Bonus