You've recently finished your graduate degree (congrats!). Fresh off graduation, you have accepted a position as a hospital administrator. They've offered you two different salary arrangements. You can have $150,000 per year for the next two years, or you can have $125,000 per year for the next two years, along with a $50,000 signing bonus today. The bonus is paid immediately, and the salary is paid in equal amounts at the end of each month. If the interest rate is 7 percent compounded monthly, which do you prefer? Please show the present value of each option.

Monthly interest rate = 7% ÷ 12 = 0.5833333%

Number of periods = 2 × 12 = 24

Option A:

Monthly salary = $150,000 ÷ 12 = $12,500

Present value of option A is computed using the equation given below:

Present value = Monthly salary × PVIFA (r, n)

                      = $12,500 × PVIFA (0.583333%, 24)

                      = $12,500 × 22.3351

                      = $279,188.75

Option B:

Monthly salary = $125,000 ÷ 12 = $10,416.666

Signing bonus = $50,000

Present value of option B is computed using the equation given below:

Present value = {Monthly salary × PVIFA (r, n)} + Signing bonus

                      = {$10,416.666 × PVIFA (0.583333%, 24)} + $50,000

                      = {$10,416.666 × 22.3351} + $50,000

                      = $232,657.29 + $50,000

                      = $282,657.29

Therefore, the present value of Option B ($282,657.29) is higher than Option A ($279,188.75). Hence, it is recommended to accept option B.