John Roberts is 55 years old and has been asked to accept early retirement from

Question

John Roberts is 55 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: (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. $170,000 cash payment to be paid immediately.
2. A 15-year annuity of $20,000 beginning immediately.
3. A 10-year annuity of $60,000 beginning at age 65.

Required:
Determine the present value, assuming that he is able to invest funds at a 9% rate, which alternative should John choose?
  

Explanation / Answer

1) 170000 cash payment is to be immediately,hence there is no requirement for present value 2) year cash flows(20000*1.09) Discount factor @9% present value 0 1 1 21800 0.917431 20000 2 21800 0.84168 18348.62 3 21800 0.772183 16833.6 4 21800 0.708425 15443.67 5 21800 0.649931 14168.5 6 21800 0.596267 12998.63 7 21800 0.547034 11925.35 8 21800 0.501866 10940.68 9 21800 0.460428 10037.33 10 21800 0.422411 9208.556 11 21800 0.387533 8448.216 12 21800 0.355535 7750.657 13 21800 0.326179 7110.695 14 21800 0.299246 6523.573 15 21800 0.274538 5984.929 Net present value 175723 3) year cash flows(60000*1.09) Discount factor @9% present value 0 1 1 65400 0.917431 60000 2 65400 0.84168 55045.87 3 65400 0.772183 50500.8 4 65400 0.708425 46331.01 5 65400 0.649931 42505.51 6 65400 0.596267 38995.88 7 65400 0.547034 35776.04 8 65400 0.501866 32822.05 9 65400 0.460428 30111.98 10 65400 0.422411 27625.67 Net present value 419714.8

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