Suzanne is a recent chemical engineering graduate, who has been offered a five y
ID: 2459776 • Letter: S
Question
Suzanne is a recent chemical engineering graduate, who has been offered a five year contract at a remote location. She has been offered two choices. The first salary choice is a fixed salary of $75,000 per year. The second one has a starting salary of $65,000 with annual increases of 5% starting in year 2. For calculation purposes, assume that her salary is paid at the end of the year. If the interest rate is 9%, calculate the present value P1 for choice 1 and present value P2 for choice 2 and determine which choice is best. The best answer is:
answer A: P2 = $277,170 and salary choice 2 is better than salary choice 1
answer B: P1 = $291,724 and salary choice 2 is better than salary choice 1
answer C: P2 = $277,070 and salary choice 1 is better than salary choice 2
answer D: P1 = $291,524 and salary choice 1 is better than salary choice 2
answer E: Either P1 or P2 or both are more than $1000 different from properly calculated
Explanation / Answer
Present value (P1), choice 1 ($) = 75,000 x PVIFA(9%, 5 years) = 75,000 x 3.8897 = 291,728
PV of choice 2 computed as follows:
Therefore, P2 = $277,070. And, since P1 > P2, option 1 is better choice.
Correct option (C).
Year Salary ($) Discount factor @9% Discounted salary ($) (A) (B) (A) x (B) 1 65,000 0.9174 59,633 2 68,250 0.8417 57,445 3 71,663 0.7722 55,337 4 75,246 0.7084 53,306 5 79,008 0.6499 51,350 Present value ($) = 2,77,070Related Questions
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