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 $85,000 per year for the next two years, or you can have $74,000 per year for the next two years, along with a $20,000 signing bonus today. The bonus is paid immediately, and the salary is paid in equal amounts at the end of each month. If the interest rate is 7 percent compounded monthly, what is the PV for both the options? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Answer 1

Present value of annuity= payment per period * [1-(1+i)^-n]/i  

i = interest rate per period

n = number of periods

Present value of option 1

= 85000/12 * [1-(1+0.07/12)^-24]/(0.07/12)

= 158206.95

Present value of option 2

= 74000/12 * [1-(1+0.07/12)^-24]/(0.07/12) + 20000

= 157733.11