Question

julie has just retired. Her company’s retirement program has two options as to how retirement benefits can be received. Under the first option, Julie would receive a lump sum of $127,000 immediately as her full retirement benefit. Under the second option, she would receive $14,000 each year for 10 years plus a lump-sum payment of $53,000 at the end of the 10-year period. Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables. Required: 1-a. Calculate the present value for the following assuming that the money can be invested at 11%. 1-b. If she can invest money at 11%, which option would you recommend that she accept

Answer 1

a. i. Present value of first option = $127,000

ii. Present value of second option:

= Present value of $14,000 annuity + Present value of $53,000 lump sum.

Present value of annuity:

= Annuity * Present value interest factor of annuity, 11%, 10 years

= 14,000 * 5.8892

= $82,448.80

Present value of lump sum:

= 53,000 / ( 1 + 11%)¹⁰

= $18,665.77

Present value of second option = 82,448.80 + 18,665.77

= $101,114.57

b. She should take the first option. It has a larger present value.