Reference no: EM133004835
You just turned 32 years old, just received your current $88,000 (annual) salary and anticipate retiring on your 67th birthday.
Your estimate of future salary growth in the current position is 3% per year. You are considering two competing job offers. The first offer (Job A) has a lower starting salary, at $80,000 per year, but higher anticipated growth rate in salary over the intermediate horizon. Specifically, you expect that salary growth in the first 5 years (i.e., until year 6) will be 8% per year; following that, you anticipate that your salary will grow at 3.5% per year. The second offer (Job B) has a higher starting salary, at $92,000 per year, and the same growth rate of 3% per year that you now have. For each of these positions, assume that salaries are paid annually and at the end of the year. For example, if you stay in your current job, your next salary payment will come in one year's time. Your opportunity cost of funds is 5% per year. Your retirement date will be constant across all career paths.
a) What is the value today of future lifetime earnings from your current position?
b) What is the net present value today of taking Job B? (Note that you'll have to give up your current job to take the new job)
c) What is the net present value today of taking Job A? (Note that you'll have to give up your current job to take the new job)
d) Which job would you take?
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