After 4 years of hard work, 23 - year old Jake graduated with his bachelor’s degree...

After 4 years of hard work, 23 - year old Jake graduated with his bachelor’s degree in finance and started job hunting. After several interviews, he has secured two job offers:

Offer from RBC: In the offer from RBC, the starting annual salary is $65,000 and RBC promises that Jake can expect 2.5% annual salary growth.

Offer from TD Bank: In the offer from TD Bank, the starting annual salary is $70,000 and TD promises that Jake can expect 1.5% annual salary growth. In addition, TD will award a one time loyalty bonus of $30,000 on the 25th year anniversary if any employee works at TD for over 25 years ,and another $50,000 bonus on the 35th year anniversary.

Assuming that Jake will stay with one employer until he retires at age of 65, which job offer should Jake take given a 4% annual interest rate (APR)?

Solutions

Expert Solution

Present Value of Annuity with RBC Bank

Present Value of Annuity with Growth =

r = 0.04

G = 0.025

n = 42 years (from 23 to 65)

= 1,979,237.2041

Present Value of Annuity with TD Bank

Present Value of Annuity with Growth =

r = 0.04

G = 0.015

n = 42 years (from 23 to 65)

= 1007700.688

Also. Present Value of loyalty Bonus = 30000 /(1+0.04)^25 + 50000 / (1+0.04)^35

= 23924.2775958

Total Present Value = 1007700.688 + 23924.2775958 = 1,031,624.97

Offer by RBC Bank is more attractive as the present Value is much higher.

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jeff jeffy answered 1 year ago

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