John Roberts is 43 years old and has been asked to accept early retirement from

Question

John Roberts is 43 years old and has been asked to accept early retirement from his company. The company has offered John three alternative compensation packages to induce John to retire: (EVOSI, PVOSI, EVAofSL PVAofS·EADofS1 and PVADOS) (Use appropriate factor(s) from the tables provided.) 1. $231,000 cash payment to be paid immediately. 2. A 20-year annuity of $22,000 beginning immediately. 3. A 10-year annuity of $75,000 beginning at age 53. Required: Determine the present value, assuming that he is able to invest funds at a 8% rate, which alternative should John choose?

Explanation / Answer

Solution :

Alternative 1: $231,000 cash payment to be paid immediately

Present value = $231,000

Alternative 2: A 20 year annuity of $22,000 beginning immediately

Present value = $22,000 * Cumulative PV factor for annuity due at 8% for 20 periods

= $22,000 * 10.6036 = $233,279.20

Alternative 3: A 10 year annuity of $75,000 beginning at age 53

Present value = $75,000 * Cumulative PV factor at 8% for 10th period to 19th period

= $75,000 * 3.356711 = $251,743.30

As present value of alternative 3 is highest, therefore john should choose alternative 3.

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