Question

IBM offers a new MBA employee a lump sum signing bonus at the date of employment.  (January, 01). Alternatively, the employee can take $5,000 at the date of employment plus $10,000 at the end of each of his first three years of service. Assuming the interest rate over the next three years is 10% annually, Would you recommend to the employee to accept a lump sum of $25,000 at employment date? Explain in detail. What is the amount that would make the employee indifferent between the two options? (ie Ignore taxes, inflation and risk.)

Answer 1

option 1	present value of lump sum payment at the time of employment		25000
Option 2-	present value	payment at present time+ present value of future annual payment	5000+ 10000*PVAF AT10% FOR 3 YEARS	5000+(10000*2.4868)	29868
	PVAF AT 10% FOR 3 YEARS	1-(1+R)^-N /R	1-(1.10)^-3/.1	2.4868
	No I would not recommend employee to accept the lump sum of 25000 at the time of employment as present value of option 2 is more
	25000 is the amount at which employee indifferent between two options because at this point Present value under both the option is same and NPV is zero