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

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Business

Maren Raymond

7 September, 04:37

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

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Karsyn Boyle · Answer 1

C.$72,867

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.