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 $68,000 per year for the next two years, or you can have $57,000 per year for the next two years, along with a $13,000 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 PV for both the options? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

   

	PV
Option 1	$
Option 2	$

Answer 1

Calculating PV of option 1

Interest rate = 8% compounded monthly

Monthly rate = interest rate / 12 = 8%/12

Annual salary = $68000, Monthly salary = 68000 / 12 = 5666.66 , No of months = 2 x no of years = 2 x 12 = 24 months

PV of option 1 = Sum of present value of monthly salaries over two years discounted at monthly rate

We can find the Sum present value of monthly salaries over two years using PV function in excel

Formula to be used in excel: =PV(rate,nper,-pmt)

Using pv function in excel, we get sum of present value of monthly salaries = 125292.9330 = 125292.93 (rounded to two decimal places)

Hence we get PV of Option = $125292.93

Calculating PV of option 2

Interest rate = 8% compounded monthly

Monthly rate = interest rate / 12 = 8%/12

Annual salary = $57000, Monthly salary = 57000 / 12 = 4750 , No of months = 2 x no of years = 2 x 12 = 24 months

Signing bonus today = $13000

PV of option 2 = Signing bonus today + Sum of present value of monthly salaries over two years discounted at monthly rate

We can find the Sum present value of monthly salaries over two years using PV function in excel

Formula to be used in excel: =PV(rate,nper,-pmt)

Using PV function in excel ,we get sum of present value of monthly salaries = 105025.0821

PV of option 2 = 13000 + 105025.0821 = 118025.0821 = 118025.08 (rounded to two decimal places)