6. (PV) You have just joined an investment bank. The company offers you two diff

Question

6. (PV) You have just joined an investment bank. The company offers you two different salary arrangements. You can have $50,000 per year for the next 3 years or $30,000 per year for the next 3 years, along with a $50,000 signing bonus today. If the market interest rate is 16%, which salary arrangement do you prefer?

7. (EAR and Nominal Interest Rate) An investment will increase in value by 270% over the next 17 years. What is the annual interest rate which, when compounded quarterly, provides this return?

8. (Perpetuity)A firm invests $3 million in a project which will yield a perpetuity of $1 million per year. What is the discount rate r for which this project’s present value is $4.5 million?

9. (Amortization) You just bought a car with loan of $50,000. You have to repay the loan in 6 years with monthly payments. The interest rate on the loan is 4%. a. What is your monthly payment? b. How much will you still owe after 4 years? (i.e. what is the loan balance after 4 years?)

Explanation / Answer

Answer 6.

Option 1:

$50,000 per year for next 3 years:

Market Interest Rate = 16%

Present Value = $50,000/1.16 + $50,000/1.16^2 + $50,000/1.16^3
Present Value = $112,294.48

Option 2:

$30,000 for next 3 years with $50,000 signing bonus today:

Market Interest Rate = 16%

Present Value = $50,000 + $30,000/1.16 + $30,000/1.16^2 + $30,000/1.16^3
Present Value = $117,376.69

So, you should select option 2 as its present value is greater.

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