You’ve just joined the investment banking firm of Dewey, Cheatum, and Howe. They
ID: 2739371 • 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 $6,100 per month for the next two years, or you can have $4,800 per month for the next two years, along with a $25,000 signing bonus today. Assume the interest rate is 7 percent compounded monthly.
Requirement 1: If you take the first option, $6,100 per month for two years, what is the present value? _____$
What is the present value of the second option?
Requirement 2:What is the present value of the second option?
Explanation / Answer
1) calculation of present value of first option
periods = 2*12=24
interest rate = 7/12=0.583%
amount= $ 6,100
present value of amount = $ 6,100*annuity factor for 24 periods @ 0.583%
=$ 6,100*22.336
=$ 136,249.62
2) calculation of present value of secondoption
periods = 2*12=24
interest rate = 7/12=0.583%
amount= $ 6,100
present value of amount = $ 4,800*annuity factor for 24 periods @ 0.583%+$ 25000
=$ 4,800*22.336+$ 25,000
=$ 106732.8+$ 25000
=$ 131,732.8
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