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 $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 PV for both the options?

I KNOW THE ANSWERS. I NEED TO KNOW THE EXACT STEPS TO INPUT THIS INTO A HP 10bll+ FINANCIAL CALCULATOR.

Expert Solution

Answer 1

Calculation of present value of Option 1 i.e. salary of $85000 per year for next 2 years i.e.$7083.33 per month

Present value of annuity = P x {[1-(1+r)^-n]/r}

Present value of annuity = present value of Option 1 = ?

P = monthly salary = $7083.33

r = interest rate per month = 9%/12 = 0.0075

n = number of compounding months = 2 years * 12 = 24

Present value of annuity = 7083.33 x {[1-(1+0.0075)^-24]/0.0075}

Present value of annuity = 7083.33 x 21.88915

Present value of annuity = 155048.12

Present value of Option 1 = $1,55,048.12

Answer 2

Calculation of present value of Option 2 i.e. salary of $74000 per year for next 2 years i.e.$6166.67 per month and immediate bonus of $30000

Present value of annuity = P x {[1-(1+r)^-n]/r}

Present value of annuity = present value of Option 2 = ?

P = monthly salary = $6166.67

r = interest rate per month = 9%/12 = 0.0075

n = number of compounding months = 2 years * 12 = 24

Present value of annuity = 6166.67 x {[1-(1+0.0075)^-24]/0.0075}

Present value of annuity = 6166.67 x 21.88915

Present value of annuity = 134983.07

Present value of Option 2 = Present value of monthly salary + Bonus = $1,34,983.07 + $30,000 = $1,64,983.07

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