Question
In: Finance
You’ve just received two job offers. Offer 1 Marketing Analyst San Bruno, CA Signing bonus: $10,000...
You’ve just received two job offers.
Offer 1 Marketing Analyst San Bruno, CA Signing bonus: $10,000 (received upfront) Starting Salary: $100,000 Expected Salary Growth per Year: 10%
Offer 2 Social Media Manager, Glossier New York, NY Signing bonus: $20,000 (received upfront) Starting Salary: $85,000 Expected Salary Growth per Year: 20%
Interest Rates on Spanish government bonds 2 yr - 2% 3 yr - 3% 5 yr - 4% 10 yr - 6% 30 yr - 9%
Interest Rates on U.S. government bonds 2 yr - 3% 3 yr - 4% 5 yr - 5% 10 yr - 7% 30 yr - 10%
Assume all cash flows occur at the end of the year.
A. Assuming your interest in the two jobs, and the costs associated with each of them (moving costs, living costs, taxes etc.), are identical, which job should you choose? Assume that your decision will be to choose the job with the higher NPV of compensation. You plan on being in whichever job you pick for 5 years.
B. What is the present value of your compensation for each of these jobs through year 3?
C. Would your decision change if you plan on quitting and going back to graduate school in 2 years?
D. What possible information would make you reverse your decision in part A?
Solutions
Expert Solution
Expert’s notes for student for better understanding of the answer –
1. While we are calculating the NPV, the upfront cash flows can be considered as the Cash flows occurred in Year 0 and they don’t need discounting. Hence they are multiplied with Present Value Factor i.e. 1.
2. Abbreviations used
a. NPV = Net Present Value
b. PVF = Present Value Factors
c. PV = Present Value
d. Ĩ = ROI = Rate of Interest - annual
3. Formula for calculating PVF = 1/ (1+ Ĩ/100)^Year
4. Formula for calculating PV = Cash flow for the Year * PVF for the Year
Information given in the question –
Offer 1 – Marketing Analyst @ San Bruno, CA
Cash Inflows -
Year 0 – Signing Up Bonus $ 10,000
Year 1 – Salary of $ 100,000 with annual growth of 10% **
Offer 2 – Social Media Manager @ Glossier, New York
Cash Inflows –
Year 0 – Signing Up Bonus $ 20,000
Year 1 – Salary of $ 85,000 with annual growth of 20% **
** Assume all cash flows occur at the end of the year. Hence salary will be paid at the end of Year 1 & so on.
A. Answering to Question A–
Since interest in the two jobs, and the costs associated with each of them (moving costs, living costs, taxes etc.), are identical for both the jobs, the same is irrelevant to decide between the jobs. (Refer Table 3 for calculation of PVF)
Calculation of NPV –
|
Table 1 |
Offer 1 – Marketing Analyst @ San Bruno, CA |
|||
|
Year |
Annual |
Cash Inflow |
PVF @ Ĩ
= 5% |
PV |
|
0 |
$ 10,000 |
1.000 |
$ 10,000 |
|
|
1 |
$ 1,00,000 |
0.952 |
$ 95,238 |
|
|
2 |
10% |
$ 1,10,000 |
0.907 |
$ 99,773 |
|
3 |
10% |
$ 1,21,000 |
0.864 |
$ 1,04,524 |
|
4 |
10% |
$ 1,33,100 |
0.823 |
$ 1,09,502 |
|
5 |
10% |
$ 1,46,410 |
0.784 |
$ 1,14,716 |
|
Gross Cash Inflow |
$ 6,20,510 |
NPV |
$ 5,33,753 |
## Ĩ = 5% for CA, USA for 5 years
|
Table 2 |
Offer 2 – Social Media Manager @ Glossier, New York |
|||
|
Year |
Annual |
Cash Inflow |
PVF @ 4% |
PV |
|
0 |
$ 20,000 |
1.000 |
$ 20,000 |
|
|
1 |
$ 85,000 |
0.962 |
$ 81,731 |
|
|
2 |
20% |
$ 1,02,000 |
0.925 |
$ 94,305 |
|
3 |
20% |
$ 1,22,400 |
0.889 |
$ 1,08,813 |
|
4 |
20% |
$ 1,46,880 |
0.855 |
$ 1,25,554 |
|
5 |
20% |
$ 1,76,256 |
0.822 |
$ 1,44,870 |
|
Gross Cash Inflow |
$ 6,52,536 |
NPV |
$ 5,75,272 |
@@ Ĩ = 4% for CA, USA for 5 years
Conclusion: Since NPV of Offer 2 is high as compared to Offer 1 for the period of 5 years, Offer 2 will be selected.
|
Table 3 |
Calculation of PVF |
||||||
|
Year |
ROI |
PVF = 1/ (1+ Ĩ/100)^Year |
PVF @ 5% |
ROI |
PVF = 1/ (1+ Ĩ/100)^Year |
PVF @ 4% |
|
|
0 |
5% |
=1/(1+5/100)^0 |
1.000 |
4% |
=1/(1+4/100)^0 |
1.000 |
|
|
1 |
5% |
=1/(1+5/100)^1 |
0.952 |
4% |
=1/(1+4/100)^1 |
0.962 |
|
|
2 |
5% |
=1/(1+5/100)^2 |
0.907 |
4% |
=1/(1+4/100)^2 |
0.925 |
|
|
3 |
5% |
=1/(1+5/100)^3 |
0.864 |
4% |
=1/(1+4/100)^3 |
0.889 |
|
|
4 |
5% |
=1/(1+5/100)^4 |
0.823 |
4% |
=1/(1+4/100)^4 |
0.855 |
|
|
5 |
5% |
=1/(1+5/100)^5 |
0.784 |
4% |
=1/(1+4/100)^5 |
0.822 |
B. Answering to Question B–
NPV calculation for 3 years –
|
Table 4 |
Offer 1 – Marketing Analyst @ San Bruno, CA |
|||
|
Year |
Annual |
Cash Inflow |
PVF @ 4% |
PV |
|
0 |
$ 10,000 |
1.000 |
$ 10,000 |
|
|
1 |
$ 1,00,000 |
0.962 |
$ 96,154 |
|
|
2 |
10% |
$ 1,10,000 |
0.925 |
$ 1,01,701 |
|
3 |
10% |
$ 1,21,000 |
0.889 |
$ 1,07,569 |
|
Gross Cash Inflow |
$ 3,41,000 |
NPV |
$ 3,15,424 |
### Ĩ = 4% for CA, USA for 3 years
|
Table 5 |
Offer 2 – Social Media Manager @ Glossier, New York |
|||
|
Year |
Annual |
Cash Inflow |
PVF @ 3% |
PV |
|
0 |
$ 20,000 |
1.000 |
$ 20,000 |
|
|
1 |
$ 85,000 |
0.971 |
$ 82,524 |
|
|
2 |
20% |
$ 1,02,000 |
0.943 |
$ 96,145 |
|
3 |
20% |
$ 1,22,400 |
0.915 |
$ 1,12,013 |
|
Gross Cash Inflow |
$ 3,29,400 |
NPV |
$ 3,10,682 |
@@@ Ĩ = 3% for NY for 3 years
Conclusion: Since NPV of Offer 1 is high as compared to Offer 1 for the period of 3 years, Offer 1 will be selected.
C. Answering to Question C–
NPV calculation for 2 years –
|
Table 6 |
Offer 1 – Marketing Analyst @ San Bruno, CA |
|||
|
Year |
Annual |
Cash Inflow |
PVF @ 3% |
PV |
|
0 |
$ 10,000 |
1.000 |
$ 10,000 |
|
|
1 |
$ 1,00,000 |
0.971 |
$ 97,087 |
|
|
2 |
10% |
$ 1,10,000 |
0.943 |
$ 1,03,686 |
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