Question

Quaker State Inc. offers a new employee a single-sum signing bonus at the date of employment. Alternatively, the employee can receive $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?

Answer 1

$57,737

Step-by-step explanation:

In this question, we have to compute the present value which is shown below :

The discount factor should be computed by

= 1 ÷ (1 + rate) ^ years

where,

rate is 10%

Year = 0,1,2,3

Discount Factor:

For Year 0 = 1 ÷ 1.10^0 = 1

For Year 1 = 1 ÷ 1.10^1 = 0.9091

For Year 2 = 1 ÷ 1.10^2 = 0.8264

For Year 3 = 1 ÷ 1.10^3 = 0.7513

So, the calculation of a Present value of all yearly cash inflows are shown below

= Year 0 cash inflow × Present Factor of Year 0 +Year 1 cash inflow × Present Factor of Year 1 + Year 2 cash inflow × Present Factor of Year 2 + Year 3 cash inflow × Present Factor of Year 3

= $8,000 × 1 + $20,000 × 0.9091 + $20,000 × 0.8264 + $20,000 × 0.7513

= $8,000 + $18,181.82 + $16,528.93 + $15,026.23

= $57,737