Question

Toselli Animation plans to offer its employees a salary enhancement package that has revenue sharing as its main component. Specifically, the company will set aside 2% of total sales revenue for year-end bonuses. The sales are expected to be $5 million the first year, $5.5 million the second year, and amounts increasing by 10% each year for the next 5 years. At an interest rate of 15% per year, what is the equivalent annual worth in years 1 through 5 of the bonus package?

Answer 1

Given: The company will set aside 2% of total sales revenue for year-end bonuses.

2% of $5 million = $100,000

Present value of the cash flow:

Where,

A1 = $100,000

g = 0.10 or 10%

i = 15% or 0.15

n = 5 years

Substituting the values in the formula

Present value of the cash flow is $398583.79207

The equivalent annual worth

The equivalent annual worth = $118903.74