Question

Problem 5-35 Comparing Cash Flow Streams [LO 1] You’ve just joined the investment banking firm of Dewey, Cheatum, and Howe. They’ve offered you two different salary arrangements. You can have $8,200 per month for the next two years, or you can have $6,900 per month for the next two years, along with a $37,000 signing bonus today. Assume the interest rate is 6 percent compounded monthly. Requirement 1: If you take the first option, $8,200 per month for two years, what is the present value? (Enter rounded answer as directed, but do not use rounded numbers in intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Present value $ 139912.93 Requirement 2: What is the present value of the second option?

Answer 1

Answer:

PV of 1st option = $185,015.50

PV of 2nd option = $192,683.78

Explanation:

Computing the present value of the monthly payments, we use the formula $PV = \frac{A(1-(1+r)^{-n}) }{r}$

Where PV = present value of the monthly payments

A = monthly salary

r = monthly interest rate = 6%/12 = 0.5% = 0.005

n = number of months = 24 months

PV of the 1st option, $8,200 monthly for the next 2 year

$PV = \frac{8,200(1-(1.005)^{-24}) }{0.005}$ = $185,015.50.

PV of the 2ns option, $6,900 monthly + $37,000 signing bonus

$PV = \frac{6,900(1-(1.005)^{-24}) }{0.005}+37,000$ = $155,683.78 + $37,000 = $192,683.78.