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 $69,000 per year for the next two years, or you can have $58,000 per year for the next two years, along with a $14,000 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?

Answer 1

Answer:

Option 1 has the higher Present Value

Explanation:

Giving the following information:

You can have $69,000 per year for the next two years, or you can have $58,000 per year for the next two years, along with a $14,000 signing bonus today.  The interest rate is 9%.

Effective rate= 0.09/12= 0.0075

Option 1:

Monthly salary= 69000/12= 5750

n= 24

i=0.0075

First, we calculate the final value:

FV= {A*[(1+i)^n)-1]}/i

FV= {5750*[(1.0075^24)-1]/0.0075= 150,583.7059

Now, we can calculate the present value:

PV= FV/(1+i)^n

PV= 150,583.7059/(1´0075^24)= 125,862.59

Option 2:

Monthly salary= 58000/12= 4833.33

n= 24

i=0.0075

FV= {4833.33*[(1.0075^24)-1]}/0-0075= 126,577.52

PV= [126,577.52/(1.0075^24)] + 14000= 119,797.50