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?
A)$23,026.
B)$57,737.
C)$62,711.
D)None of these is correct.The lump sum equivalent would be $8,000 + the present value of a $20,000 ordinary annuity where n=3 and i=10%.That is, $8,000 + ($20,000 x 2.48685 from Table 4) = $57,737.

Question

Quizplus · Accepted Answer

The lump sum equivalent would be $8,000 + the present value of a $20,000 ordinary annuity where n=3 and i=10%. That is, $8,000 + ($20,000 x 2.48685 from Table 4) = $57,737. Therefore, the employee should choose the lump sum option if it is greater than or equal to $57,737, and the installment option if it is less than $57,737.