Garland Inc

Multiple Choice

Garland Inc. offers a new employee a lump sum signing bonus at the date of employment, June 1, 2009. Alternatively, the employee can take $39,000 at the date of employment plus $10,000 each June 1 for five years, beginning in 2013. Assuming the employee's time value of money is 9% annually, what lump sum at employment date would make him indifferent between the two options?

A) $44,035.
B) $40,855.
C) $69,035.
D) $65,855.The lump sum equivalent would be $39,000 + the present value of a $10,000 deferred annuity.The present value of the deferred annuity on June 1, 2010 is an annuity due with n=5 and i=9%.That is, ($10,000 x 4.23972 from Table 6) = $42,397.To compute the equivalent of that amount at employment date, we take the present value of $42,397 where n=4 and i=9% from Table 2, which is $42,397 x 0.70843 = $30,035.Therefore, the lump sum equivalent would be $39,000 + $30,035 = $69,035.