Mary has been working at the university for 25 years, with an excellent record of service. As a result, the board wants to reward her with a bonus to her retirement package. They are offering her $75,000 a year for 20 years, starting one year from her retirement date and each year for 19 years after that date. Mary would prefer a one-time payment the day after she retires. What would this amount be if the appropriate interest rate is 7%?

Mary could receive a lump-sum payment of $912599.20, if she chose to accept the bonus this way instead of a payment plan that has an interest rate of 7%. Calculated using the Present Value Formula, this amount takes the current value of the payments to be made in the future and discountes them at a certain interest rate. In Mary’s case, she would be receiving $75,000 annually for 20 years with an interest rate of 7%, which equates to a total payment amount of $1 500 000. Applying the present value formula to this figure produces the lump sum amount due on retirement day – $912 599.20.

Mary must consider all of her financial circumstances before making a decision. Each option has its own benefits and downsides depending on the individual. Financial advisors can also provide additional advice, insight and help with these decisions.