Question

Problem 5-8 (Algo) Deferred annuities (LO5-8] John Roberts is 50 years old and has been asked to accept early retirement from his company. On July 1, the company offered John three alternative compensation packages to induce John to retire: (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) 1. $185,000 cash payment to be paid immediately. 2. A 13-year annuity of $22,000 beginning immediately. 3. A 10-year annuity of $62,000 beginning on July 1 of the year John reaches age 60 (after 10 years). Required: Determine the present value, assuming that he is able to invest funds at a 8% rate, which alternative should John choose? (Round your final answers to nearest whole dollar amount.) Alternative PV 1 2 3 John should choose

Answer 1

John roberts should choose the alternative with highest present value :

Alternative 1

$185000

Alternative 2

PV=PVAD=$22000*8.53608=$187793. 76= $1877934

Present value of Annuity due of $1; n=13,i=8% (from PVAD of $1)

Alternative 3

PV= $62000*6.71008=$416025

Present value of ordinary Annuity of$1;n=10, i=8 (from PVA of $1)

PV=$416025*0.50025=$208116

PV of $1 at n=9,i=8% (from PV of $1)

Thus, John should choose alternative 3.

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