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 $156,000 immediately as her full retirement benefit. Under the second option, she would receive $19,000 each year for fifteen years plus a lump-sum payment of $64,000 at the end of the fifteen-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 13%. (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 $156,000 immediately as her full retirement benefit. Under the second option, she would receive $19,000 each year for fifteen years plus a lump-sum payment of $64,000 at the end of the fifteen-year period.

Explanation / Answer

Option1 Present Value =                    156,000.00 Option 2 PV =                      133,018.21 Option1 Is better Statemnet showing Cash flows Particulars Time PVf@13% Amount PV Cash inflows                                 1.00                    0.8850                   19,000.00         16,814.16 Cash inflows                                 2.00                    0.7831                   19,000.00         14,879.79 Cash inflows                                 3.00                    0.6931                   19,000.00         13,167.95 Cash inflows                                 4.00                    0.6133                   19,000.00         11,653.06 Cash inflows                                 5.00                    0.5428                   19,000.00         10,312.44 Cash inflows                                 6.00                    0.4803                   19,000.00           9,126.05 Cash inflows                                 7.00                    0.4251                   19,000.00           8,076.15 Cash inflows                                 8.00                    0.3762                   19,000.00           7,147.04 Cash inflows                                 9.00                    0.3329                   19,000.00           6,324.81 Cash inflows                               10.00                    0.2946                   19,000.00           5,597.18 Cash inflows                               11.00                    0.2607                   19,000.00           4,953.26 Cash inflows                               12.00                    0.2307                   19,000.00           4,383.41 Cash inflows                               13.00                    0.2042                   19,000.00           3,879.13 Cash inflows                               14.00                    0.1807                   19,000.00           3,432.85 Cash inflows                               15.00                    0.1599                   19,000.00           3,037.92 Cash inflows                               15.00                    0.1599                   64,000.00         10,233.01 PV of Cash Inflows      133,018.21 Note Table is not provided so we have taken PVF based on Computations. There may be some rounding off difference

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