Question

You have just joined the investment banking firm of Vancouver, BC. They have offered you three different salary arrangements. You can have $ 90,000 per year for the next six years, or you can have $ 70,000 per year for the next six years, along with $ 50,000 signing bonus today, or you can have 100,000 in one year and 230,000 in two years and 220,000 in three years from now. The bonus is paid immediately, and the salary is paid at the end of each year. If the discount rate is 10% compounded semiannually, which of the three options do you prefer? Calculate the present value of the first, the second and the third offer to justify your answer.

Answer 1

The present value is computed as shown below:

= Future value / (1 + r)n

Present value of first offer is computed as follows:

= $ 90,000 / 1.101 + $ 90,000 / 1.102 + $ 90,000 / 1.103 + $ 90,000 / 1.104 + $ 90,000 / 1.105 + $ 90,000 / 1.106

= $ 391,973.463

Present value of second offer is computed as follows:

= $ 50,000 + $ 70,000 / 1.101 + $ 70,000 / 1.102 + $ 70,000 / 1.103 + $ 70,000 / 1.104 + $ 70,000 / 1.105 + $ 70,000 / 1.106

= $ 354,868.249

Present value of third offer is computed as follows:

= $ 100,000 / 1.10 + $ 230,000 / 1.102 + $ 220,000 / 1.103

= $ 446,280.9917

Since the present value of the third offer is the largest, hence we shall prefer option three

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