Quaker state inc. offers a new employee a single-sum signing bonus at the date of employment. alternatively, the employee can receive $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?

$57,737

Explanation:

In this question, we have to compute the present value which is shown below :

The discount factor should be computed by

= 1 ÷ (1 + rate) ^ years

where,  

rate is 10%  

Year = 0,1,2,3

Discount Factor:

For Year 0 = 1 ÷ 1.10^0 = 1

For Year 1 = 1 ÷ 1.10^1 = 0.9091

For Year 2 = 1 ÷ 1.10^2 = 0.8264

For Year 3 = 1 ÷ 1.10^3 = 0.7513

So, the calculation of a Present value of all yearly cash inflows are shown below

= Year 0 cash inflow × Present Factor of Year 0  +Year 1 cash inflow × Present Factor of Year 1 + Year 2 cash inflow × Present Factor of Year 2 + Year 3 cash inflow × Present Factor of Year 3

= $8,000 × 1 + $20,000 × 0.9091 + $20,000 × 0.8264 + $20,000 × 0.7513

= $8,000 + $18,181.82 + $16,528.93 + $15,026.23

= $57,737

if you use only 25 for your entertainment and only 200 for the groceries that you really need and take out the 50 per month for the computer then that should be enough