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 $7,400 per month for the next two years, or you can have $6,100 per month for the next two years, along with a $33,000 signing bonus today. Assume the interest rate is 6 percent compounded monthly a. If you take the first option, $7,400 per month for two years, what is the present value? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. 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.)

Answer 1

a. If we take 1st option , $ 7,400 per month for next 2 years ( or say 24 months )

Annuity Amount = 7,400

Rate of Interest = 6% p.a. compounded monthly i.e. 0.05% per month

No. of periods = 24 (as we need to compound monthly)

present value annuity factors of 0.05% for 24 periods = 25.6869

present value under 1st option = $ 7,400 multiply 25.6869 = $ 190,083

b. If we take 2nd option , $33,000 today and  $6,100 per month for next 2 years ( or say 24 months )

Annuity Amount = 6,100

Rate of Interest = 6% p.a. compounded monthly i.e. 0.05% per month

No. of periods = 24 (as we need to compound monthly)

present value annuity factors of 0.05% for 24 periods = 25.6869

present value under 2nd option = $ 33,000 + ( $ 6,100 multiply 25.6869 )= $ 189,690

Option 1 is more beneficial.