Question

No excel please! I am trying to learn the math for Exam! Thank yoU!

You have just joined the investment banking firm of Mckenzie & Co. They have offered you two different salary arrangements. You can have $75,000 per year for the next two years, or you can have $55,000 per year for the next two years, along with a $30,000 signing bonus today. If the interest rate is 12% compounded monthly, which is a better offer? NB: first convert the annual percentage rate of 12% to EAR and use the EAR as the discount rate.

Answer 1

- Interest Rate = 12%compounded monthly

calculating the effective Annual rate:-

Where,

r = Interest rate = 12%

m = no of times compounding in a year = 12 (compounded monthly)

EAR = 1.126825 - 1

EAR = 12.6825%

Arrangement 1: You can have $75,000 per year for the next two years

calculating its Present value today:-

Where, C= Periodic Payments = $75,000

r = Periodic Interest rate = 12.6825%

n= no of periods = 2

Present Value = $125,626.16

Arrangement 2: you can have $55,000 per year for the next two years, along with a $30,000 signing bonus today

Calculating the Present Value of 2-year salary and Signing Bonus

Where, C= Periodic Payments = $55,000

r = Periodic Interest rate = 12.6825%

n= no of periods = 2

Present Value = $122,125.85

So, Arrangement 1 is better as its provides higher value today of Future Salaries.

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