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I was doing question Rose from June 2011 and came across employee bonuses. I managed to work out the total of the bonuses for over the 5 year period but didn’t complete the note by working on the average over the three years using the discount factor..
Please can you explain the calculation $884 x 1/1.08 (power 4) = 0.65 I get that the discount rate is 8% and the power is (total years 5 -1) but why 1/1.08 what does this achieve?
I maybe really blonde in asking this.
Thank you
JemmaIt is called discounting factor. Using infor you put here I would profer this help: From your F9 studies (check out the formular sheet for any paper) the present value of $1 receivable in n yrs is 1 * (1+r)^-n or 1/(1+r)^n . In the formular r = 0.08, ^ = “power of” n= number of periods to recieve. Pluging in your data into the formular : the PV of 884 receivable ate the end of Yr4 is 884/(1+0.08)^4 or 884*1.08^-4 = $649.77. Since i.t.o. IAS19 you have to take into consideration time value of money here you therefor cannot ignore the discounting aspect. Hope that helps,
Ngu
Thanks for your input Ngu ……. however, I was not aware that you had been upgraded to tutor and this page is called “Ask the tutor”
I’m delighted that you feel willing to help but please restrict your assistance to questions on the general forum
Thanks
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