Question

In: Finance

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

You’ve just joined the investment banking firm of Dewey, Cheatum, and Howe. They’ve offered you two different salary arrangements. You can have $6,100 per month for the next two years, or you can have $5,100 per month for the next two years, along with a $25,000 signing bonus today. Assume the interest rate is 7 percent compounded monthly.

a. If you take the first option, $6,100 per month for two years, what is the present value? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
b. What is the present value of the second option? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Solutions

Expert Solution

a. First option

No. of periods = 2*12 = 24 months

Annual interest rate = 7%, compounded monthly

so, monthly interest rate = rm = 7%/12

This is an annuity with a cash flow of $6100 per month for 24 months

C = 6100, no. of periods = n = 24, monthly rate = rm = 7%/12 = 0.00583333333333333

The present value of an annuity can be calculated using the below formula:

PVAnnuity = (C/rm)*[1-(1+rm)-n]

PVAnnuity = (6100/(7%/12)) * [1-(1+(7%/12))-24]

PVAnnuity = 1045714.28571429*0.130288079225785 = 136244.105704678

Answer -> Present value of first option = $136244.11

b. Second option

In the second option, there is an amount that is paid today and also, there is an annuity, with monthly cash flow of $5100 for 24 months. Present value of this option will be the sum of C0 and the present value of the annuity

Amount paid today as signing bonus = C0 = $25000

Annuity -> C = 5100, rm = 7%/12, n = 24

PVannuity = (5100/(7%/12))*[1-(1+(7%/12))-24] = 874285.714285714*0.130288079225785 = 113909.006408829

Total present value of the second option = C0 + PVAnnuity = 25000 + 113909.006408829 = 138909.006408829

Answer -> Present value of the second option = $138909.01


Related Solutions

You’ve just joined the investment banking firm of Dewey, Cheatum, and Howe. They’ve offered you two...
You’ve just joined the investment banking firm of Dewey, Cheatum, and Howe. They’ve offered you two different salary arrangements. You can have $85,000 per year for the next two years, or you can have $74,000 per year for the next two years, along with a $30,000 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 9 percent compounded monthly, what is the...
You've just joined the investment banking firm of Dewey, Cheatum, and Howe. They've offered you two...
You've just joined the investment banking firm of Dewey, Cheatum, and Howe. They've offered you two different salary arrangements. You can have $111,000 per year for the next two years, or you can have $40,000 per year for the next two years, along with a $25,000 signing bonus today. The bonus is paid immediately, and the salary is paid at the end of each year. Required: (a) If the interest rate is 7 percent compounded monthly, what is the present...
Today is your first day at the investment banking firm of Dewey, Cheatum and Howe. They...
Today is your first day at the investment banking firm of Dewey, Cheatum and Howe. They have offered you a choice between two different compensation arrangements. You can have a salary of $95,000 per year for the next two years, or you can have a salary of $84,000 per year for the next two years and a signing bonus $20,000 that is paid today. The bonus is paid immediately and the salary is paid in equal amounts at the end...
you have just joined the investment banking firm of dewey cheated and howe.They have offered you...
you have just joined the investment banking firm of dewey cheated and howe.They have offered you two different salary arrangements.you can have 8100$ per month for the next three years or you can have 6800$ per month for the next three years. along with a 36500$ signing bonus today.assume the interest rate is 8 percent compounded monthly. if you take thef
Question 6. You have just joined the investment banking firm. They have offered you two different...
Question 6. You have just joined the investment banking firm. They have offered you two different salary arrangements. You can have $95,000 per year for the next two years, or you can have $70,000 per year for the next two years, along with a $45,000 signing bonus today. The bonus is paid immediately, and the salary is paid at the end of each year. If the interest rate is 10% compounded monthly, which do you prefer?
Mr. Howe, a Partner of the CPA firm Dewey, Cheatem & Howe (DC&H), after reviewing an...
Mr. Howe, a Partner of the CPA firm Dewey, Cheatem & Howe (DC&H), after reviewing an audit of “GUBER EATS” by DC&H has become concerned that GUBER EATS is not paying the National minimum wage of $19.49/hr. When he talked to the manager of GUBER EATS, Mr. Howe was informed that this was not a minimum-wage issue because the international students delivering for GUBER EATS are independent contractors (e.g. they set up companies and registered for ABNs). Also, the $16.50/hr...
Your broker, the leading sales generator at the firm Dewey, Cheatem and Howe, calls you with...
Your broker, the leading sales generator at the firm Dewey, Cheatem and Howe, calls you with an investment opportunity. If you send him $2000 today, he will send back to you $1050 a year from now, and $1300 a year after that. You require a 12% annual return. Based on the present value of these future cash flows, is this a good investment? Yes No
Maria is a Paralegal at Dewey, Cheatham & Howe, a law firm in Arizona. Information about...
Maria is a Paralegal at Dewey, Cheatham & Howe, a law firm in Arizona. Information about her 2018 income and expenses is as follows: Income received Salary                                                                                      $150,000 Taxes withheld from Salary: Federal Income tax                 $30,000 State Income Tax                         9,000 Social Security Tax                      7,961 Medicare Tax 2,175 Interest income from bank                                                            6,000 Dividend income from U.S. Stocks                                                4,000 Short-Term Capital Gain 2,000 Long-Term Capital Gain 3,000 State income tax refund from last year 500 Expenses Paid: Unreimbursed dental and eye-care costs 1,800 Property taxes on her...
The law firm of Dewey, Cheethan, and Howe files claims against unscrupulous car repair shops that...
The law firm of Dewey, Cheethan, and Howe files claims against unscrupulous car repair shops that take advantage of consumers who know nothing about cars. A lawyer who takes a 20-minute break after every two hours of work can process one claim with six hours of work. If the lawyer takes a 20-minute break after every four hours of work she can process one claim with eight hours of work. If she takes a 20-minute break after every hour of...
5) Four Months after the audit firm of Dewey, Cheatem, & Howe issued an Unqualified opinion...
5) Four Months after the audit firm of Dewey, Cheatem, & Howe issued an Unqualified opinion that the F/S of Crook Puppy Investments (CPI) Ltd (an investment form registered with ASIC) were True and Fair, the Australian Federal Police (AFP) raided the offices of CPI, found that CPI had been engaged in money laundering for two Bikie Gangs, seized CPI’s resources as the proceeds of crime, and shut the firm down. Shortly there-after, CPI declared bankruptcy and was able to...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT