Quaker State Inc.offers a new employee a lump-sum signing bonus at the date of employment.Alternatively,the employee can take $8,000 at the date of employment plus $20,000 at the end of each of his first three years of service.Assuming the employee's time value of money is 10% annually,what lump-sum at employment date would make him indifferent between the two options?

Question

Quizplus · Accepted Answer

We need to find the present value of the second option and compare it with the lump-sum signing bonus.

PV of second option = $8,000 + $20,000/(1+0.1)^1 + $20,000/(1+0.1)^2 + $20,000/(1+0.1)^3 
= $8,000 + $18,181.82 + $16,528.93 + $15,025.39 
= $57,736.14

So, the employee would be indifferent between the two options if the lump-sum signing bonus is also $57,736.14. However, none of the answer choices match this exact value. The closest is (B) $57,737, which is off by only $0.86 due to rounding. Therefore, (B) is the best choice.