Expert: Doug Ingram - 7/6/2005

Question
Hi 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!

Answer
Sue,
I just got back today after being gone for 10 days.
I answered one questions, but don't have the time to review each question.
I need to limit these homework-type issues to one a week.
I don't mind multiple questions I can answer quickly.
Thanks!