Question

Garland Inc. offers a new employee a single-sum signing bonus at the date of employment, June 1, 2021. Alternatively, the employee can receive $54,000 at the date of employment plus $25,000 each June 1 for four years, beginning in 2024. Assuming the employee's time value of money is 9% annually, what single amount at the employment date would make the options equally desirable?

a)$122,170

b)$66,942

c) $116,942

d) $72,170

Answer 1

The correct answer is option a

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The single amount that makes the options equally desirable is found by calculating the present value of the stream of payments received by the employee.

The present value of the stream of payments is calculated as follows:-

Present value = $ 122,170

Thus the single amount at the employment date would make the options equally desirable =  $ 122,170