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 $76,000 per year for the next two years, or you can have $65,000 per year for the next two years, along with a $21,000 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?

Option 1:

Option 2:

You’ve just joined the investment banking firm of Dewey, Cheatum, and Howe. They’ve offered you two different salary arrangements. You can have $76,000 per year for the next two years, or you can have $65,000 per year for the next two years, along with a $21,000 signing bonus today. The bonus is paid immediately, and the salary is paid in equal amounts at the end of each month.

Explanation / Answer

I arrangement              II arrangement

76000 per year                 65000

6333.33 per month            5416.67 per month

No bonus                         21000 bonus

If interest is compounded monthly at 9%:

Option I:

For the Cash Flow Series
NPV = $133,692.45

Option II:

For the Cash Flow Series
NPV = $135,342.23

Cash Flow Stream Detail Period Cash Flow Present Value 0 0.00 0.00 1 76,000.00 69,724.77 2 76,000.00 63,967.68 3 0.00 0.00 4 0.00 0.00 5 0.00 0.00 6 0.00 0.00 7 0.00 0.00 Total: 133,692.45

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