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

Question

A. You've just joined the investment banking firm of Dewey, Cheatum, and Howe. Theyve offered you two different salary arrangements. You can have $95,000 per year for he next two years, or you can have $70,000 per year for the next two years, along with a $45,000 signing bonus today. The bonus is paid immediately, and the salary is paid at the end of each year. If the interest rate is 10 percent compounded monthly, which do you prefer?

B. Consider a firm with a contract to sell an asset for $165,000 four years from now. The asset costs $94,000 to produce today. Given a relevant discount rate on this asset of 13 percent per year, will the firm make a profit on this asset?

C. You borrow $50,000 5 year loan to make renovations to a house. The interest rate on this loan is 8% per year. The loan calls for equal monthly payments.

C. 1. What is the monthly payment on this loan?

C. 2. When you make the third payment, how much of the payment is interest?

C. 3. How much is principal?

Explanation / Answer

A. You've just joined the investment banking firm of Dewey, Cheatum, and Howe. Theyve offered you two different salary arrangements. You can have $95,000 per year for he next two years, or you can have $70,000 per year for the next two years, along with a $45,000 signing bonus today. The bonus is paid immediately, and the salary is paid at the end of each year. If the interest rate is 10 percent compounded monthly, which do you prefer?

Effective Annual Interest Rate = (1+10%/12)^12 - 1

Effective Annual Interest Rate = 10.47%

First salary arrangement $95,000 per year for he next two years

Present Value = 95000/1.1047 + 95000/1.1047^2

Present Value = $ 163,841.95

Second salary arrangement $70,000 per year for he next two years along with a $45,000 signing bonus today

Present Value =45000 + 70000/1.1047 + 70000/1.1047^2

Present Value = $ 165,725.64

Decision : You should prefer second salary arrangement $70,000 per year for he next two years along with a $45,000 signing bonus today which is higher present value

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