After graduation, you receive two job offers. For simplicity assume that you are

Question

After graduation, you receive two job offers. For simplicity assume that you are paid only once a year, at the end of the year. You expect interest rates to remain unchanged at 10% over the next two years.

?  AB Corporation offers you a guaranteed $100,000 per year for two years but no signing bonus.

?  CD Corporation offers you a one-time $20,000 signing bonus, $70,000 base salary guaranteed every year for two years, and an annual bonus that will be based on your performance and the performance of your group. For simplicity, assume that you expect the annual bonus to be exactly the same nominal amount in each of the two year (=X).

a) Write an equation to show how you would calculate X so that you are indifferent between the two

competing offers.

b)  Solve for X.

c)  Based on this information only, under what conditions would be choose the offer from AB

Corporation?

Explanation / Answer

Present value of first offer $100,000*PVAF (10%,2yrs) $100,000*1.7355 173553.719 32066.116 Present value of second offer 3.1555 10161.9761 $20,000+$70,000*PVAF(10%,2yrs)+2x*1.5777 $20,000+$70,000*1.7355+2x*1.5777 $141487.6+3.1555X Indifference point $141487.6+3.1555X=173553.719 By solving ,we get X=10162 (approx)

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