Quaker State Inc

Multiple Choice

Quaker State Inc. offers a new employee a lump sum signing bonus at the date of employment. Alternatively, the employee can take $8,000 at the date of employment plus $20,000 at the end of each of his first three years of service. Assuming the employee's time value of money is 10% annually, what lump sum at employment date would make him indifferent between the two options?

A) $23,026.
B) $57,737.
C) $62,711.
D) None of these is correct.The lump sum equivalent would be $8,000 + the present value of a $20,000 ordinary annuity where n=3 and i=10%.That is, $8,000 + ($20,000 x 2.48685 from Table 4) = $57,737.