Bull Built, a design/build engineering company that has always given year-end bonuses in the amount of $4,000

Question

Bull Built, a design/build engineering company that has always given year-end bonuses in the amount of $4,000 to each of its engineers, is hav-ing cash flow problems. The president said that although Bull Built couldn’t give bonuses this year, next year’s bonus would be large enough to make up for this year’s omission. If the interest rate is 10% per year, what is the equivalent bonus that engineers should receive next year?

Answer 1

If the 4,000 were placed on deposit for 1 year it would be worth 4,400. Th ecompany is essentially "borrowing" the bonuses for a year and woul have to pay a total of 8400 the following year to make the engineers whole