Question

You’ve just joined the investment banking firm of Dewey, Cheatum, and Howe. They’ve offered you two different salary arrangements. You can have $85,000 per year for the next two years, or you can have $74,000 per year for the next two years, along with a $20,000 signing bonus today. The bonus is paid immediately, and the salary is paid in equal amounts at the end of each month.

Answer 1

Answer:

Option 2 is slightly better.

Explanation:

Giving the following information:

They’ve offered you two different salary arrangements. You can have $85,000 per year for the next two years, or you can have $74,000 per year for the next two years, along with a $20,000 signing bonus today.

To determine which of the options is better, we need to calculate the present value. To do this we will assume an interest rate of 10% per year compounded annually.

PV= FV*(1+i)^n

Option 1:

PV= 85000/1.10 + 85,000/1.10^2= $147,520.66

Option 2:

PV= 20,000 + 74,000/1.10 + 74,000/1.10^2= 148,429.7

Option 2 is slightly better.