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 $79,000 per year for the next two years, or you can have $68,000 per year for the next two years, along with a $24,000 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?

If the interest rate is 9 percent compounded monthly, what is the PV for both the options?

Explanation / Answer

the PV for both the option-1=$79,000*Present value of annuity factor for 2 years@9%=$79,000*1.7591=$138,968.9=$138,969

Present value of annuity factor for 2 years@9%=1/1.09+1/1.092=1.7591

the PV for both the option-2=+$24,000+$68,000*Present value of annuity factor for 2 years@9%=+$24,000+$68,000*1.7591=$143,618.8=$143,619

so second option is better,because it has high present value

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