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You've just joined the investment banking firm of Dewey, Cheatum, and Howe
You've just joined the investment banking firm of Dewey, Cheatum, and Howe. They've offered you two different salary arrangements. You can have $7,300 per month for the next three years, or you can have $6,000 per month for the next three years, along with a $32,500 signing bonus today. Assume the interest rate is 8 percent compounded monthly.
a.If you take the first option, $7,300 per month for three years, what is the present value? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
b.What is the present value of the second option? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Expert Solution
a). Computation of the value of first option:-
PV = Annuity * ((1-(1+rate)^-n)/rate)
Here,
Rate = 8%/12 = 0.6667% (monthly)
n = 3*12 = 36 periods (monthly)
PV = $7,300*((1-(1+0.6667%)^-36)/0.6667%)
= $7,300*31.91181
= $232,956.18
b). Computation of the value of second option:-
Total value = Annuity * ((1-(1+rate)^-n)/rate) + Joining bonus
= $6,000*((1-(1+0.6667%)^-36)/0.6667%) + $32,500
= $6,000*31.91181 + $32,500
= $191,470.83 + $32,500
= $223,970.83
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