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

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 $69,000 per year for the next two years, or you can have $58,000 per year for the next two years, along with a $14,000 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? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) PV Option 1 Option 2

Explanation / Answer

Option 1) $69000 per year

Thus per month salary = 69000/12 = 5750$

Rate per month = 9%/12 = 0.75%

N = 2*12 = 24

PV = A[1-(1/(1+r)^n) /r ]

=5750[1-1/(1.0075)^24 / 0.0075]

=5750[1-0.835831 / 0.0075]

=5750[21.88915]

=125,863$

Opttion 2) $14000 now and Monthly salary of (58000/12) = 4833.333$

PV of monthly salary = 4833.33*21.88915

=105797.5

PV of option 2 = 105797.5+14000 = 119798$

Thus option 1 should be selected

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