Question

Q1: As a result of a slowdown in operations, Tradewind Stores is offering employees who have been terminated a severance package of $105,000 cash paid today; $105,000 to be paid in one year; and an annuity of $34,000 to be paid each year for 3 years.   

What is the present value of the package assuming an interest rate of 12 percent? (Future Value of $1, Present Value of $1. Future Value Annuity of $1. Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Round the final answer to nearest whole dollar.) Present Value $ 104,208

Q2: After completing a long and successful career as senior vice president for a large bank, you are preparing for retirement. After visiting the human resources office, you have found that you have several retirement options to choose from:

1. An immediate cash payment of $1.07 million.
2. Payment of $61,000 per year for life.
3. Payment of $51,000 per year for 4 years and then $71,000 per year for life (this option is intended to give you some protection against inflation).

You believe you can earn 9 percent on your investments and your remaining life expectancy is 8 years.  

Answer 1

	Q1)
		Calculation Of Present Value
				Cash Flow	Dscount Factor	Present Value
			Today	105000	1	105000
			1 Year after	105000	0.8929	93754.5
			3 year annuity	34000	2.4018	81661.2
			Present Value total			280416
	Q2)		Net Present Value - Option A
			=$1070000
			Net Present Value - Option B
			Annul Payment	61000
			PV Annuity factor 8 years *9%	5.5348
			Present value	337622.8
			Net Present Value - Option C
		Year	Cash Flow	PV Factor	Present Value
		1	51000	0.9174	46787.4
		2	51000	0.8417	42926.7
		3	51000	0.7722	39382.2
		4	51000	0.7084	36128.4
		5	71000	0.6499	46142.9
		6	71000	0.5963	42337.3
		7	71000	0.547	38837
		8	71000	0.5019	35634.9
			Present Value		328176.8
		Option A should be selected, as its NPV is greater.