Question

Gail Trevino expects to receive a $500,000 cash benefit when she retires five years from today. Ms. Trevino's employer has offered an early retirement incentive by agreeing to pay her $325,000 today if she agrees to retire immediately. Ms. Trevino desires to earn a rate of return of 8 percent.

Required: Calculate the present value of the $500,000 future cash benefit. Assuming that the retirement benefit is the only consideration in making the retirement decision, should Ms. Trevino accept her employer's offer?

Answer 1

The present value of Gail Trevino's future retirement benefit of $500,000, at an 8% rate of return over five years, is $340,266.75. Since this amount is greater than the $325,000 offered for early retirement, financially, she should not accept the employer's offer.

Step-by-step explanation:

To calculate the present value of the $500,000 future cash benefit Gail Trevino expects to receive upon retirement, we use the present value formula:

PV = FV / (1 + r)ⁿ

Where:

• PV is the present value,
• FV is the future value ($500,000),
• r is the annual interest rate (0.08), and
• n is the number of years until payment (5).

Plugging in the values, we get:

PV = $500,000 / (1 + 0.08)⁵

PV = $500,000 / (1.469328)

PV = $340,266.75

Given that Ms. Trevino's employer has offered her $325,000 to retire immediately, and the present value of the retirement benefit she would receive in five years is $340,266.75, her decision should be based on whether the immediate payment is adequate, considering she desires an 8% return.

If we strictly consider the monetary value, Ms. Trevino should not accept the early retirement offer because the present value of what she would receive in five years is more than the amount offered now.