You’ve just joined the investment banking firm of Dewey, Cheatum, and Howe. They’ve offered you

You’ve just joined the investment banking firm of Dewey, Cheatum, and Howe. They’ve offered you two different salary arrangements. You can have $83,000 per year for the next two years, or you can have $72,000 per year for the next two years, along with a $28,000 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 final answers to 2 decimal places. (e.g., 32.16))

   

	PV
Option 1	$
Option 2	$

rev: 08_21_2012


Explanation:

Here we need to compare two cash flows, so we will find the value today of both sets of cash flows. We need to make sure to use the monthly cash flows since the salary is paid monthly. Doing so, we find:

PVA1 = $83,000/12({1 – 1/[1 + (0.08/12)]24} / (0.08/12)) = $152,931.26

PVA2 = $28,000 + $72,000/12({1 – 1/[1 + (0.08/12)]24} / (0.08/12)) = $160,663.26

  

Calculator Solution:

Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

 

Enter

2 × 12

8% / 12

$83,000 / 12

N

I/Y

PV

PMT

FV

Solve for

$152,931.26

   

Enter

2 × 12

8% / 12

$72,000 / 12

N

I/Y

PV

PMT

FV

Solve for

$132,663.26

$132,663.26 + 28,000 = $160,663.26