Category: Business and Money > Finance
Asked by: fatima1102-ga
List Price: $2.00
10 Sep 2005 23:29 PDT
Expires: 10 Oct 2005 23:29 PDT
Question ID: 566664
You have just joined a regional investment banking firm. They have offered you two different salary arrangements. You can have $81,000 per year for the next 3 years or $60,000 per year for the next 3 years, along with a $50,000 signing bonus today. If the market interest rate is 16%, what is the present value of the best salary arrangement?
Re: present value
Answered By: elmarto-ga on 11 Sep 2005 07:40 PDT
Hello fatima! You can find a good discussion on the subject of present value at: Calculating the Present and Future Value of Annuities http://www.investopedia.com/articles/03/101503.asp In the case you give, the present value (PV) of the $81,000 per year option would be (assuming that the first payment comes one year from now): PV = 81000/(1+0.16)^1 + 81000/1.16^2 + 81000/1.16^3 = 69827.58 + 60196.19 + 51893.27 = 181917.04 So the present value of this option is $181,917.04 The present value of $60,000 per year plus bonus option would be (again, assuming that the first $60,000 payment comes one year from now): PV = 50000 + 60000/1.16^1 + 60000/1.16^2 + 60000/1.16^3 = 184753.37 So the present value of this option is $184,753.37. Since it's higher than the other one, this is the best salary arrangement for you. I hope this helps! Best wishes, elmarto
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