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hotpotato |
07/06/05 |
i expert, I have a question to ask you and I want to show you what
i have done so I am on the right track. Can you please let me know
if i'm doing the right thing?
You are a talented event coordinator in the music industry. You are
approached by two record companies: Soul Sisters Inc. and Soul
Brothers Ltd. both of whom offer you a 4 year contract during which
you will be responsible for organizing live shows for their top
musicians. Soul Sisters Inc. offers to pay you a $5000 up front
bonus and a salary of $100,000 per year. Soul Sisters Inc. will pay
you an additional $10,000 terminal bonus upon completion of your
contract. Soul Brothers Ltd. will pay you a monthly salary of
$10,000. It will not pay an up front nor a terminal bonus but it
will pay a $2000 annual bonus starting at the end of year 2. Soul
Brothers Ltd. also requires that you pay for all expenses associated
with printing flyers and posters out of your own pocket. Based on
your experience you can predict with accuracy that this will cost
you $1000 per year.
a) Assuming a discount rate of 5%, which record company’s offer
is more attractive?
b) If soul brothers did not require you to pay the costs
associated with printing flyers and posters out of your own pocket,
would your answer in part a change?
a) Contract 1 Soul sisters
first 3 years:
PVA = C x [1-(1/(1+r)^t)]/r
PVA = 100000 [1-[1/(1.05)^3]/0.05
= 272320 + 5000 bonus
= 277320
4th year
PVA = 100000 [1-[1/(1.05)^1]/0.05
= 95240 + 1000 terminal bonus
=105240
277320 + 105240 = 382560
Contract 2:
first year:
PVA = 120000 [1-[1/(1.05)^1]/0.05
= 114285.7143
subtract 1000 expense
= 113285.7143
second year: 113285.7143 + 2000 annual bonus = 115285.7143
third year 113285.7143
fourh year: 113285.7143
total = 455142.8572
therefore soul brothers more attractive because it pays more
b) year 1: 114285.7143
year 2: 114285.7143 + 2000
year 3: 114285.7143
year 4; 114285.7143
total = 459142.8572 (no expense included)
can you check the above answers for me please?
thank you so much! |
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