Asked by Brianna Sparks on Jun 20, 2024
Verified
Fresh out of college, you are negotiating with your prospective new employer. They offer you a signing bonus of $2,000,000 today or a lump sum payment of $2,500,000 three years from now. If you can earn 7% on your invested funds, which of the following is true?
A) Take the signing bonus because it has the lower present value.
B) Take the signing bonus because it has the higher future value.
C) Take the lump sum because it has the higher present value.
D) Take the lump sum because it has the lower future value.
E) Based on these numbers, you are indifferent between the two.
Present Value
The valuation in current terms of a future amount of money or cash inflows, using a specified rate of return.
Signing Bonus
A signing bonus is a one-time payment given to an individual upon accepting a new job offer, often used as an incentive for recruitment.
Lump Sum Payment
A single payment made for the total amount owed, rather than breaking the payment into installments, often used in settling debts or purchasing goods.
- Discern the differences between present value and future value principles in finance.
- Use the notion of the time value of money to examine investment possibilities.
Verified Answer
LL
lissette lopezJun 21, 2024
Final Answer :
C
Explanation :
To determine the better option, calculate the present value (PV) of the $2,500,000 lump sum payment using the formula PV = FV / (1 + r)^n, where FV is the future value, r is the annual interest rate, and n is the number of years. Here, FV = $2,500,000, r = 7% or 0.07, and n = 3. So, PV = $2,500,000 / (1 + 0.07)^3 ≈ $2,009,233. This is higher than the $2,000,000 signing bonus today, making the lump sum the better option due to its higher present value.
Learning Objectives
- Discern the differences between present value and future value principles in finance.
- Use the notion of the time value of money to examine investment possibilities.