Question

You must select between two alternative summer jobs:

Job A will pay you $2000 at the beginning of June, but you have to work for eight weeks.

Job B will pay you $400 at the beginning of June and $205 each week for the next eight weeks. In all other respects, the jobs are comparable – either one will do.

The current interest rate is 12%. Which job should you choose to maximize your earnings?

A) Job A B) Job B

The answer was marked as Job B but I cannot figure out why?

Answer 1

ANSWER:

Lets calculate the present value for both jobs at the begining of june.

pv of job a = $2,000 (paid upfront)

pv of job b = $400 (paid upfront) + payment per week(p/a,i,n) = $400 + $205(p/a,12%/52,8) = $400 + $205 * 9.87 = $400 + $1,623.10 = $2,023.10

since the pv of job b is greater then that of job a therefore it will be chosen to maximize your earnings.