Fresh out of college, you are negotiating with your prospective new employer. They offer you a signing bonus of $2,000,000 today or a lump sum payment of $2,500,000 three years from now. If
You can earn 7% on your invested funds, which of the following is true?
A) Take the signing bonus because it has the lower present value.
B) Take the signing bonus because it has the higher future value.
C) Take the lump sum because it has the higher present value.
D) Take the lump sum because it has the lower future value.
E) Based on these numbers, you are indifferent between the two.

Question

Quizplus · Accepted Answer

To determine the present value of the payments, we need to calculate the present value of each option using a discount rate of 7%.
The present value of the signing bonus would be:
$2,000,000 / (1 + 0.07)^0 = $2,000,000
The present value of the lump sum payment would be:
$2,500,000 / (1 + 0.07)^3 = $2,030,720.89
Therefore, the present value of the lump sum payment is higher, so you should take the lump sum option.

Fresh Out of College, You Are Negotiating with Your Prospective