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 1% 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 8% per year, what is the equivalent annual worth in years 1 through 5 of the bonus package?
What will be an ideal response?
Solve for P g in geometric gradient equation and then convert to A
A 1 = 5,000,000(0.01) = 50,000
P g = 50,000[1 – (1.10/1.08) 5 ]/(0.08 – 0.10)
= $240,215
A = 240,215(A/P,8%,5)
= 240,215(0.25046)
= $60,164
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