Page 446 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

432 The Complete Guide to Executive Compensation

probability with the 25-year-old. In Table 8-19, the value of $1 received at four different ages
(25, 35, 45, and 55) is extended to age 65 and then discounted back to the respective age.
For example, a $1 increase in salary received at age 25 would result in $40 at the end of
a 40-year period if no interest were paid on the $1 over the 40 years (i.e., one dollar a year).
This $40 would have a present value of $5.68 if a 5 percent discount rate were assumed.

Discount from One at Age 65 to…
Discount Rate Age 25 Age 35 Age 45 Age 55

1% $26.87 $22.26 $16.39 $9.05
2 18.12 16.56 13.46 8.20
3 12.26 12.36 11.07 7.44
4 8.33 9.25 9.13 6.76
5 5.68 6.94 7.54 6.14
6 3.89 5.22 6.24 5.58
7 2.56 3.94 5.17 5.08
8 1.84 2.98 4.29 4.63
9 1.27 2.27 3.57 4.22
10 0.88 1.72 2.97 3.86
Table 8-19. Discount value in dollars based on time and interest rate

Table 8-20 expresses the present value in percentage terms. The example of a $1 increase
at age 25 over a 40-year period assuming a 5 percent discount would result in the same $5.68
shown in Table 8-19 (i.e., 40 years times 0.142 $5.68).

Discount from One at Age 65 to…

Discount Rate Age 25 Age 35 Age 45 Age 55
1% 0.672 0.742 0.820 0.905
2 .453 .552 .673 .820
3 .307 .412 .554 .744
4 .208 .308 .456 .676
5 0.142 0.231 0.377 0.614
6 .097 .174 .312 .558
7 .067 .131 .258 .508
8 .046 .099 .215 .463
9 .032 .075 .178 .422
10 0.022 0.057 0.149 0.386
Table 8-20. Discount value in percentage based on time and interest rate
If, however, the $1 set aside does appreciate, then it is obviously worth more than
$1 years later. Table 8-21 shows the power of compound growth shown earlier in Table 8-17.
Thus, $1 set aside and allowed to grow at a rate of 10 percent a year would be worth
$45.26 forty years later. Using Table 8-20, we know that the present value of $45.26 received