Question

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.

Answer 1

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