You've just joined the investment banking firm of Dewey, Cheatum, and Howe. They've offered you two different salary arrangements. You can have \[tex]$7,200 per month for the next two years, or you can have \$[/tex]5,900 per month for the next two years, along with a \[tex]$32,000 signing bonus today. Assume the interest rate is 7 percent compounded monthly.

a. If you take the first option, \$[/tex]7,200 per month for two years, what is the present value?
Note: 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?
Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.

\begin{tabular}{|l|l|}
\hline
a. Value of first option & \\
\hline
b. Value of second option & \\
\hline
\end{tabular}



Answer :

Let's break down and solve the problem step-by-step:

### a. Present Value of the First Option

The first option offers you [tex]$7,200 per month for the next two years. 1. Identify the parameters: - Monthly salary (\( Pmt \)): $[/tex]7,200
- Number of months ([tex]\( n \)[/tex]): 2 years [tex]\(\times\)[/tex] 12 months/year = 24 months
- Annual interest rate ([tex]\( r_{annual} \)[/tex]): 7%

2. Convert annual interest rate to a monthly rate:
[tex]\[ r_{monthly} = \frac{r_{annual}}{12} = \frac{0.07}{12} = 0.00583333 \][/tex]

3. Use the present value of an annuity formula:
[tex]\[ PV = Pmt \times \left( \frac{1 - (1 + r_{monthly})^{-n}}{r_{monthly}} \right) \][/tex]
Plugging in the values, we get:
[tex]\[ PV = 7,200 \times \left( \frac{1 - (1 + 0.00583333)^{-24}}{0.00583333} \right) \approx 160,812.71 \][/tex]

Therefore, the present value of the first option is [tex]\( \$ 160,812.71 \)[/tex].

### b. Present Value of the Second Option

The second option offers you [tex]$5,900 per month for the next two years and a $[/tex]32,000 signing bonus today.

1. Identify the parameters for monthly payments:
- Monthly salary ([tex]\( Pmt \)[/tex]): [tex]$5,900 - Number of months (\( n \)): 24 months - Monthly interest rate (\( r_{monthly} \)): 0.00583333 (same as above) 2. Calculate the present value of the monthly payments using the annuity formula as above: \[ PV_{\text{payments}} = Pmt \times \left( \frac{1 - (1 + r_{monthly})^{-n}}{r_{monthly}} \right) \] Plugging in the values, we get: \[ PV_{\text{payments}} = 5,900 \times \left( \frac{1 - (1 + 0.00583333)^{-24}}{0.00583333} \right) \approx 131,777.09 \] 3. Add the signing bonus: - Signing bonus today is not discounted because it's paid right now, so it retains its value: $[/tex]32,000

4. Total present value of the second option:
[tex]\[ PV_{\text{option 2}} = PV_{\text{payments}} + \text{Signing bonus} = 131,777.09 + 32,000 = 163,777.09 \][/tex]

Therefore, the present value of the second option is [tex]\( \$ 163,777.09 \)[/tex].

### Summary
```
\begin{tabular}{|l|l|}
\hline
a. Value of first option & \[tex]$ 160,812.71 \\ \hline b. Value of second option & \$[/tex] 163,777.09 \\
\hline
\end{tabular}
```