Exercise 11A-2 Basic Present Value Concepts [LO11-5] Julie has just retired. Her

Question

Exercise 11A-2 Basic Present Value Concepts [LO11-5]

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 $158,000 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 $66,000 at the end of the five-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 12%. (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 $158,000 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 $66,000 at the end of the five-year period.

Explanation / Answer

1a) Present value under option 1 = $ 158,000

Present value under option 2 = (PVAF@12%,5 *CF )+(PVF@12%,5 *Salvage)

                        =(3.60478*21000) + (.56743 * 66000)

                         = 75700.30+ 37450.38

                           = 113150.68

1b) First option will be preferred as it has highest present value .

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