Jerry recently was offered a position with a major accounting firm. The firm offered Jerry either a signing bonus of $23,000 payable on the first day of work or a signing bonus of $26,000 payable after one year of employment. Assuming that the relevant interest rate is 10%, which option should Jerry choose?
A) The options are equivalent.
B) Insufficient information to determine.
C) The signing bonus of $23,000 payable on the first day of work.
D) The signing bonus of $26,000 payable after one year of employment.

Question

Quizplus · Accepted Answer

To compare the two options, we need to bring their values to the same point in time. The relevant interest rate is 10%, which means that the future value of $23,000 after one year is:

FV = PV x (1 + r)
FV = $23,000 x (1 + 0.10)
FV = $25,300

So if Jerry takes the $23,000 upfront, he could invest it for one year at 10% and have $25,300 at the end of the year. Therefore, the option to take $26,000 after one year of employment is better since it provides a higher amount at that point in time.

Jerry Recently Was Offered a Position with a Major Accounting