You’ve just joined the investment banking firm of Dewey, Cheatum, and Howe. They
ID: 2711866 • Letter: Y
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 $7,100 per month for the next three years, or you can have $5,800 per month for the next three years, along with a $31,500 signing bonus today. Assume the interest rate is 5 percent compounded monthly. Requirement 1: If you take the first option, $7,100 per month for three years, what is the present value? Requirement 2: What is the present value of the second option?
Explanation / Answer
monthly Interest rate = 5/12= .41667%
number of months = 12 *3 =36 months
option 1) present value = monthly salary *PVAF@ .41667%,36
= 7100 * 33.36568
= $ 236,896.34
option2) Bonus + (monthly salary *PVAF@.41667%,36)
= 31500 + (5800 * 33.36568)
= 31500 + 193520.94
= $ 225,020.94
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