You’ve just joined the investment banking firm of Dewey, Cheatum, and Howe. They’ve offered you two different salary arrangements. You can have $7,600 per month for the next two years, or you can have $6,300 per month for the next two years, along with a $34,000 signing bonus today. Assume the interest rate is 7 percent compounded monthly. Requirement 1: If you take the first option, $7,600 per month for two years, what is the present value? Requirement 2: What is the present value of the second option?
Answer :
Option 1
You can have $7,600 per month for the next two years
Assume the interest rate is 7 percent compounded monthly
Amount =7600
i = 7%
monthlu rate =7/12
=0.583
=
P = $7600[(1 – (1/(1+.00583)24))/.00583]
= 169760.24
Option 2
you can have $6,300 per month for the next two years, along with a $34,000 signing bonus today.
So total receipt =Pv of $ 6300 permonth+ $34,000 signing bonus
Pv of $ 6300 permonth
P = $63 [(1 – (1/(1+.00583)24))/.00583]
= 140722.31
Total PV for second option
=140722.31 +34000
= 174722.31
Comment:
You should choose the second option because Present value is more then in the first option
