Quaker State Inc. offers a new employee a lump-sum signing bonus at the date of employment. Alternatively, the employee can take $8,000 at the date of employment plus $20,000 at the end of each of his first three years of service. Assuming the employee's time value of money is 10% annually, what lump sum at employment date would make him indifferent between the two options?
A)$23,026.
B)$57,737.
C)$62,711.
D)None of the above is correct.

Question

Quizplus · Accepted Answer

The present value of the second option is calculated by discounting the future payments at 10% annually. The present value of $20,000 received at the end of each of the first three years is $49,737. Adding the $8,000 received at the date of employment gives a total present value of $57,737.