Question

You’ve just joined the investment banking firm of Dewey, Cheatum, and Howe. They’ve offered you two different salary arrangements. You can have $72,000 per year for the next two years, or you can have $61,000 per year for the next two years, along with a $17,000 signing bonus today. The bonus is paid immediately, and the salary is paid in equal amounts at the end of each month.If the interest rate is 9 percent compounded monthly, what is the PV for both the options? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

Instructions are listed below.

Explanation:

Giving the following information:

Option 1:

You can have $72,000 per year for the next two years

Option 2:

You can have $61,000 per year for the next two years, along with a $17,000 signing bonus today. The bonus is paid immediately, and the salary is paid in equal amounts at the end of each month.

The interest rate is 9 percent compounded monthly.

To calculate the present value, we need to use the following formula:

PV= FV/(1+i)^n

First, we need to calculate the final value on both options:

FV= PV*(1+i)^n

For each year

Option 1:

i= 0.09/12= 0.0075

n= 12

Year 1= 72,000*1.0075^24= 86,141.77

Year 2= 72,000*1.0075^12= 78,754.09

Total= 164,895.86

PV= 164,895.86/1.0075^24= 137,825.14

Option 2:

Year 1= 61,000*1.0075^24= 72,981.23

Year 2= 61,000*1.0075^12= 66,722.22

Total= 139,703.45

PV= 139,703.45/ 1.0075^24= 116,768.53 + 17,000= 133,768.53

Option 1 is more profitable.