Question

In: Finance

You've just been hired at a new job. You expect to work there for 5 years....

You've just been hired at a new job. You expect to work there for 5 years. Your boss offers you a hiring bonus of either $2,728 today, or an additional $35 per month, starting next month, on your salary.

If your investments earn 2.75% APR (compounded monthly), how much would you gain or lose by taking the cash-bonus today?

If you would lose money, indicate your answer with a negative number.

Solutions

Expert Solution

Compute the monthly rate of interest, using the equation as shown below:

Monthly rate = Annual rate/ 12 months

                      = 2.75%/ 12 months

                      = 0.22916666666%

Hence, the monthly rate of interest is 0.22916666666%.

Compute the present value annuity factor (PVIFA), using the equation as shown below:

Hence, the present value annuity factor is 55.9979068739.

Compute the present value of monthly bonus, using the equation as shown below:

Present value = Monthly bonus*PVIFA

                      = $35*55.9979068739

                      = $1,959.92674058

Hence, the present value of monthly bonus is $1,959.92674058.

Compute the gain or loss on taking cash bonus today, using the equation as shown below:

Gain = Cash bonus today – Present value of monthly bonus

         = $2,728 – $1,959.92674058

         = $768.07325942

Hence, the gain on taking cash bonus today is $768.07325942.

jeff jeffy answered 2 years ago
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