You have recently accepted a one year employment term by a firm.The firm has given you the option of receiving your salary as a lump sum value of $30,000 at the end of the year or as 12 monthly payments of $2,400 starting one month after you start work.If your relevant discount rate is 2 percent per month,then which salary options would you prefer? (Ignore taxes,risk,and consumption needs. )Choose the best answer.
A) The lump sum payment,since it has the larger future value.
B) Monthly payments,since you do not have to wait so long to receive your money.
C) Either one,since they have the same present value.
D) The lump sum payment,since it has the larger present value.
E) Monthly payments,since it has the larger present value.

Question

Quizplus · Accepted Answer

To determine the preferred option, we calculate the present value (PV) of both options using the discount rate of 2% per month. The lump sum payment of $30,000 at the end of the year has a straightforward present value calculation. For the monthly payments, we calculate the present value of an annuity (the series of monthly payments). The present value of the monthly payments, when calculated correctly, is higher than the present value of the lump sum due to the effect of receiving money earlier and thus being able to invest it at the given discount rate. Therefore, the monthly payments option has a larger present value, making it the preferred choice.

You Have Recently Accepted a One Year Employment Term by a Firm.The