Question

Quaker State Inc. offers a new employee a single-sum signing bonus at the date of employment. Alternatively, the employee can receive $10,000 at the date of employment plus $40,000 at the end of each of his first two years of service. Assuming the employee's time value of money is 9% annually, what lump sum at employment date would make him indifferent between the two options

Answer 1

$80.364.45

Step-by-step explanation:

The lump sum that would make the employee indifferent can be determined by calculating the present value of the annuity

Present value is the sum of discounted cash flows

Present value can be calculated using a financial calculator

Cash flow in year 0 = $10,000

Cash flow in year 1 = $40,000

Cash flow in year 2 = $40,000

I = 9%

PV = $80,364.45

To find the PV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute