Julie has just retired. Her company’s retirement program has two options as to h

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 $120,000 immediately as her full retirement benefit. Under the second option, she would receive $15,000 each year for ten years plus a lump-sum payment of $50,000 at the end of the ten-year period.

Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.

Calculate the present value for the following assuming that the money can be invested at 11%. (Use the appropriate table to determine the discount factor(s).)

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 $120,000 immediately as her full retirement benefit. Under the second option, she would receive $15,000 each year for ten years plus a lump-sum payment of $50,000 at the end of the ten-year period.

Explanation / Answer

Option 1 Present value = 120000

Option 2 Present value = Annual Equity * PVAF ( 11%,10years) + Lump Sum amount * PVF ( 11%,10 Years)

= 15000*5.8892+50000*0.3522

= 88338+17610 i.e 105948

Option 1 is better to receive 120000 today

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