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?

Answer 1

Use spreadsheet for the ease in computations. Enter values and formulas in the spreadsheet as shown in the image below.

A C Option-2 1 Option-1 2 Annual salary 3 Signing bonus 85000 74000 20000 |=C2/12 10.07 -B2/ 12 0.07 4 Monthly salary, PMT 5 Annual interets rate -B5/12 |=C5/12 6 Monthly interets rate, RATE 7 Contract duration in years 8 Contract duration in months, NPER B7*12 2 2 |-C7*12 --PV(B6,B8.B4,0,0)+B3 |=-PV(C6,C8,C4,0,0)+C3 10 Present vahue of salary, PV 11 PV(rate, nper, pmt, [fvl, [type]) 12 13 It is evident from the above computation that the present value of the second option is the over the second salary option 14 least. Thus, the first salary option should be preferred 15 14

The obtained result is provided below.

A C 1 Option-1 $ 85,000 Option-2 $ 74,000 2 Annual salary 3 Signing bomus 4 Monthly salary, PMT 5 Annual interets rate 6 Monthly interets rate, RATE 7 Contract duration in years 8 Contract duration in months, NPER $ 20,000 0 S 7,083.33 S 6,166.67 7% 7% 0.58333333%|0.58333333% 2 2 24 24 $ 158,206.95 S 157,733.11 10 Present value of salary, PV 11 12 It is evident from the above computation that the present value of the 13 second option is the least. Thus, the first salary option should be 14 preferred over the second salary option 15