Question

Big Bonus or Bigger Bonus: Comparing Future Values

CONGRATULATIONS!!!  You have just been offered your dream job after graduating   from Jacksonville University.  In response to your negotiations concerning your compensation package, the company has offered you a couple of different stock options in addition to the agreed upon salary.

Under the first option, you would receive stocks with a value of $2,000,000 at the end of each year.  This option also includes an additional $4,000,000 bonus that you would receive for staying at the company for 3 years.

Under the second option, you would receive stocks with a value of $1,000,000 at the end of each year.  This option also includes an additional $8,000,000 bonus that you would receive for staying at the company for 3 years.

Assume that these stocks grow at a rate of 11% compounded monthly.  Moreover, assume that you will leave the company at the end of your fourth year to start your own firm. Which option will you choose. (The more money you have to start your own firm, the better.)

Your formal solutions should include ...
⦁   The overall goal and/or purpose.
⦁   The given information
⦁   A time-line for each option
⦁   A future value for each individual stock payment provided you by the company
⦁   The total future value of each option at the time you plan to leave the company
⦁   Your conclusion

Answer 1

The overall goal and/or purpose.
To maximize the earnings from Job salary and bonus by the end of 4th year in order to start own firm
Given information
Option 1	$2,000,000 p.a stock at the end of each year + $4,000,000 stock bonus at the end of 3rd year
Option 2	$1,000,000 p.a stock at the end of each year + $8,000,000 stock bonus at the end of 3rd year
Stock growth rate = 11% p.a compounded monthly
Timeline for each option
	Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap
	Y-0		Y-1		Y-2		Y-3		Y-4 (exit at end of year)
Option 1			$2,000,000		$2,000,000		$2,000,000 + 4mn bonus		$2,000,000
Option 2			$1,000,000		$1,000,000		$1,000,000 + 8mn bonus		$1,000,000
Future value for each individual stock payment provided you by the company
Total future value of each option at the time you plan to leave the company
	Year	Option 1	Growth@11% compounded monthly	FVIF	FV of option 1
	1	20,00,000	[1+(11/1200)]^3*12	1.388879	27,77,758.00
	2	20,00,000	[1+(11/1200)]^2*12	1.244829	24,89,658.00
	3	60,00,000	[1+(11/1200)]^1*12	1.115719	66,94,314.00
	4	20,00,000	[1+(11/1200)]^0*12	1	20,00,000.00
			Total Future value at the time of exit		1,39,61,730.00
	Year	Option 2	Growth@11% compounded monthly	FVIF	FV of option 2
	1	10,00,000	[1+(11/1200)]^3*12	1.388879	13,88,879.00
	2	10,00,000	[1+(11/1200)]^2*12	1.244829	12,44,829.00
	3	90,00,000	[1+(11/1200)]^1*12	1.115719	1,00,41,471.00
	4	10,00,000	[1+(11/1200)]^0*12	1	10,00,000.00
			Total Future value at the time of exit		1,36,75,179.00
Conclusion		Since Future value under option 1 is greater, Option 1 must be selected.
		1,39,61,730.00	>	1,36,75,179.00