Julie has just retired. Her company’s retirement program has two options as to h
ID: 2411193 • Letter: J
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 $142,000 immediately as her full retirement benefit. Under the second option, she would receive $21,000 each year for five years plus a lump-sum payment of $61,000 at the end of the five-year period.
Calculate the present value for the following assuming that the money can be invested at 14%. (Use Microsoft Excel to calculate present values. Do not round intermediate calculations.)
First option
Second option
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 $142,000 immediately as her full retirement benefit. Under the second option, she would receive $21,000 each year for five years plus a lump-sum payment of $61,000 at the end of the five-year period.
Present Value of First Option Cash Flow Present Value Lump-sum payment Present Value of Second Option Cash Flow Present Value Annual annuity Lump-sum payment Total present valueExplanation / Answer
Present value of first option CF DF Present value Lump-sum payment $142,000 1 $142,000 Present value of Second option CF DF @14% Present value Annual annuity (for five year) $21,000 3.4331 $72,095 Lump-sum payment ( at the End of 5 th Year) $61,000 0.5194 $31,683 Total present value $103,779 1) First Option would be prefer First Option : Present Value of $142000 received today will be $142000 Second Option Present Value of $21000 received each year for 5 years plus a $61000 Lumpsump at year 5 would be $103778.50
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