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 $7,300 per month for the next three years, or you can have $6,000 per month for the next three years, along with a $32,500 signing bonus today. Assume the interest rate is 8 percent compounded monthly.

If you take the first option, $7,300 per month for three years, what is the present value? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Present value            $

What is the present value of the second option? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Present value            $

Explanation / Answer

Option 1:

Monthly Payment = $7,300
Annual Interest Rate = 8%
Monthly Interest Rate = 0.667%
Period = 3 years or 36 months

Present Value = $7,300 * PVIFA(0.667%, 36)
Present Value = $7,300 * (1 - (1/1.00667)^36) / 0.00667
Present Value = $7,300 * 31.90993
Present Value = $232,942.49

Option 2:

Signing Bonus = $32,500
Monthly Payment = $6,000
Annual Interest Rate = 8%
Monthly Interest Rate = 0.667%
Period = 3 years or 36 months

Present Value = $32,500 + $6,000 * PVIFA(0.667%, 36)
Present Value = $32,500 + $6,000 * (1 - (1/1.00667)^36) / 0.00667
Present Value = $32,500 + $6,000 * 31.90993
Present Value = $223,959.58

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