Davenport Inc. offers a new employee a lump sum signing bonus at the date of employment. Alternatively, the employee can take $30,000 at the date of employment and another $50,000 two years later. Assuming the employee's time value of money is 8% annually, what lump sum at employment date would make her indifferent between the two options?
A)$60,000.
B)$62,867.
C)$72,867.
D)$80,000.The lump sum equivalent would be $30,000 + the present value of $50,000 where n=2 and i=8%.That is, $30,000 + ($50,000 x 0.85734 from Table 2) = $72,867.

Question

Quizplus · Accepted Answer

The employee would be indifferent between the two options if they both have the same present value. Using the time value of money formula and assuming a lump sum X at employment date:

X = $30,000 + ($50,000 / (1+0.08)^2)

X = $30,000 + ($50,000 / 1.1664)

X = $30,000 + $42,832.87

X = $72,867.87

Therefore, a lump sum of $72,867 at employment date would make the employee indifferent between the two options.