Question

Quaker State Inc. offers a new employee a single-sum signing bonus at the date of employment. Alternatively, the employee can receive $8,600 at the date of employment plus $26,000 at the end of each of his first three years of service. Assuming the employee's time value of money is 8% annually, what lump sum at employment date would make him indifferent between the two options

Answer 1

Answer: $‭75,604.6‬0

Step-by-step explanation:

The lump sum that would make the employee indifferent between the two option is the one that is equal to the present value of the part payments.

Given a constant payment of $26,000 per year this will be the present value of an annuity.

Present Value of the Annuity = 26,000 * Present Value interest factor of an annuity, 3 years, 8%

= 26,000 * 2.5771

= 67,004.6‬0

Total present Value = 8,600 + 67,004.6‬0

= $‭75,604.6‬0

If the lump sum offered was $‭75,604.6‬0, employee would be indifferent.