Question

Davenport Inc. offers a new employee a single-sum signing bonus at the date of employment. Alternatively, the employee can receive $30,000 at the date of employment and another $50,000 two years later. Assuming the employee's time value of money is 8% annually, what single sum at the employment date would make her indifferent between the two options

Answer 1

The single sum at the employment date would make her indifferent between the two options is: $72,867.

Single sum at the employment date

Using this formula

Single sum=Amount- received+ Present value

Let plug in the formula

Single sum=$30,000+($50,000/(1+0.08)²

Single sum=$30,000+($50,000/(1.08)²)

Single sum=$30,000+($50,000/1.1664)

Single sum=$30,000+42,867

Single sum= $72,867

Inconclusion The single sum at the employment date would make her indifferent between the two options is: $72,867.

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