You\'ve just joined the investment banking firm of Dewey, Chatom, and Howe. They

Question

You've just joined the investment banking firm of Dewey, Chatom, 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 P V for both the options? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) PV option 1 $ option 2 $

Explanation / Answer

- Effective Annual Interest Rate = (1 + 0.09/12)12 - 1 = 0.0938 or 9.38%.

- We need to calculate the present value of the future cash flows under both the decisions to make any decision:

Option 1
Present Value = 79,000 x PVAF(9.38%, 2 years) = 79,000 x 1.75 = $138,256.78

Option 2
Present Value = 24,000 + 68,000 x PVAF(9.38%, 2 years) = 24,000 + (68,000 x 1.75) = $143,005.84

Since, the present value of future cash flows is higher in the case of Option 2. Thus, we should select Option 2.

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