Question

You have just joined the investment banking firm of Dewey, Cheatum, and Howe. They have offered you two different salary arrangements. You can have $100,000 yer year for the next three years.

OR

You can have $90,000 per year for the next three years, along with a $30,000 signing bonus today. The bonus is paid immediately, and the salary is paid at the end of each year. If the market interest rate is 5 percent, which do you prefer?

***Please show your work***

Answer 1

Option A:

Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=100,000[1-(1.05)^-3]/0.05

=100,000*2.723248029

=$272,324.80(Approx).

Option B:

Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=90,000[1-(1.05)^-3]/0.05

=90,000*2.723248029

=$245,092.32(Approx)

Hence total present value =$245,092.32+30,000

=$275,092.32(Approx).

Hence $90,000 for next 3 years with $30,000 bonus today is better option having higher present value.