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 R30,000 at the end of the year or as 12 monthly payments of R2,400 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.

Question

Quizplus · Accepted Answer

To determine the best choice, we need to calculate the present value of both options using the relevant discount rate of 2% per month.

Option 1 (lump sum payment):
PV = 30,000/(1+0.02)^12 = R25,235.34

Option 2 (monthly payments):
PV = (2,400/(1+0.02)^1) + (2,400/(1+0.02)^2) + ... + (2,400/(1+0.02)^12) = R25,235.34

Therefore, the present value of both options is the same. However, in terms of immediate cash flow, monthly payments may be preferred since the money is received incrementally throughout the year.

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