You’ve just joined the investment banking firm of Dewey, Cheatum, and Howe. They

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 $85,000 per year for the next two years, or you can have $74,000 per year for the next two years, along with a $30,000 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.)

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.)

Explanation / Answer

Solution:

PV of Annuity = Annuity * Present Value Annuity Factor[r,n]

where,

r = rate of interest,

n = number of interest periods.

Option 1:

Monthly Pay = $85,000 / 12 = $7,083.33333

PV of Annuity = $7,083.33333 * 9.70661 = $68,755.15

PV =  $68,755.15

Option 2:

Monthly Pay = $74,000 / 12 = $6,166.66667

PV of Annuity = $6,166.66667 * 9.70661 = $59,857.42833

Total PV = Immediate Bonus + PV of Annuity(Monthly Pay) = $30,000 + $59,857.42833 = $89,857.43

PV = $89,857.43

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