Gail Trevino expects to receive a $560,000 cash benefit when she retires seven y

Question

Gail Trevino expects to receive a $560,000 cash benefit when she retires seven years from today. Ms. Trevino's employer has offered an early retirement incentive by agreeing to pay her $358,000 today if she agrees to retire immediately. Ms. Trevino desires to earn a rate of return of 10 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required a. Calculate the present value of the $560,000 future cash benefit. Assuming that the retirement benefit is the only consideration in making the retirement decision, should Ms. Trevino accept her employer's offer? (Round your final answer to the nearest whole dollar value.) Present value Should Ms. Trevino accept the offer? Yes

Explanation / Answer

Future cash flows = $560,000

Period after which amount would be received (n) = 7 years

Present value of $1 for 7 years @ 10% = 0.513158 ( from above table)

Present value of $560,000 = $560,000 x 0.513158 = $287369

Since the PV of $560,000 ($287369) is less than the early retirement incentive offered by employer ($358,000) Ms.Trevino should accept the offer.

Note: We should consider PV factor and not PVA factor because future cash flows will not be received as annuity. We receive future cash flows as a whole after 7years period.

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