Question

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 $50,000two years later. Assuming the employee's time value of money is 8% annually, what lump sumat employment date would make her indifferent between the two options?A.$60,000.B.$62,867.C.$72,867.D.$80,000

Answer 1

C.$72,867

Step-by-step explanation:

The present value = Future value/(1+rate)^n, in which n is number of period

So value of $50,000 at employment date = $50,000/(1+8%)^2 = $42,867

So the lump sum at employment date = $30,000 + $42,867 = $72,867

And this amount ($72,867) is indifferent with $30,000 at the date of employment and another $50,000two years later.