Youve just joined the investment banking firm of Dewey Cheat

You\'ve just joined the investment banking firm of Dewey, Cheatum, and Howe. They\'ve offered you two different salary arrangements. You can have $71.000 per year for the next two years, or you can have $60,000 per year for the next two years, along with a $16.000 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 8 percent compounded monthly, what is the value today of each option? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g.. 32.16.) Option 1 Option 2

Solution

Value today Option 1 $ 1,30,815.44 Option 2 $ 1,26,548.26 Working: Option 1: Monthly Salary = $       71,000 / 12 = $ 5,916.67 Present Value of annuity of 1 = (1-(1+i)^-n)/i Where, = (1-(1+0.00667)^-24)/0.00667 i 8%/12 = 0.00667 = 22.10965 n 2*12 = 24 Present Value of salary = Monthly Salary x Present Value of annuity of 1 = $       5,916.67 x 22.10965 = $ 1,30,815.44 Option 2: Monthly Salary = $           60,000 / 12 = $    5,000 Present Value of signing bonus = $           16,000 Present value of monthly salary = Monthly Salary x Present value of annuity of 1 = $             5,000 x 22.10965 = $ 1,10,548.26 Present Value of total cash flows = $           16,000 + $ 1,10,548.26 = $ 1,26,548.26