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 $130,000 immediately as her full retirement benefit. Under the second option, she would receive $19,000 each year for 5 years plus a lump-sum payment of $75,000 at the end of the 5-year period. Click here to view Exhibit 128-1 and Exhibit 128-2, to determine the appropriate discount factors) 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? Complete this question by entering your answers in the tabs below. Req 1A Req 18 Calculate the present value for the following assuming that the money can be invested at 11%. (Round your final answers to the nearest whole dollar amount.) Option 1 Option 2 Present value Reg 1 Reg 10 >

Answer 1

Answer:

Part 1)

Option 1 Option 2 Present Value $130,000 $114,730.90

Thus option 1 is better as we are getting higher present value.

Calculation:

$130,000 received today is worth $130,000 only and for option 2 calculation is as below:

End of Yr 1 2 3 Amt PVF Amt*PVF 19000 0.9009 17117.12 19000 0.8116 15420.83 19000 0.7312 13892.64 19000 0.6587 12515.89 94000 0.5935) 55784.42| Total 114730.9 4 5

Part 2)

Present Value 1 Ten percent $ 310,460.66 2 Fourteen percent $ 259,684.33

Calculation:

1. PV (500,000, r=10%, n=5 years)=500000*0.620921=310460.66

2. PV (500,000, r=14%, n=5 years)=500000*0.519368=259684.33

Part 3)

Maximum Price 1 Sixteen percent $ 32,472.05 2 Twenty percent $ 26,860.12

Calculation:

1. PVAF($7,000, n=8 years, r=16%)=7000*4.6388=32472.05

2. PVAF($7,000, n=8 years, r=20%)=7000*3.8372=26860.12

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