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 better option, calculate the present value (PV) of the $2,500,000 lump sum payment using the formula PV = FV / (1 + r)^n, where FV is the future value, r is the annual interest rate, and n is the number of years. Here, FV = $2,500,000, r = 7% or 0.07, and n = 3. So, PV = $2,500,000 / (1 + 0.07)^3 ≈ $2,009,233. This is higher than the $2,000,000 signing bonus today, making the lump sum the better option due to its higher present value.

Fresh Out of College, You Are Negotiating with Your Prospective