John Roberts is 40 years old and has been asked to accept early retirement from

Question

John Roberts is 40 years old and has been asked to accept early retirement from his company. The company has offered John three alternative compensation packages to induce John to retire: (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) 1. $251,000 cash payment to be paid immediately 2. A 20-year annuity of $23,000 beginning immediately. 3. A 10-year annuity of $72,000 beginning at age 50. Required Determine the present value, assuming that he is able to invest funds at a 7% rate, which alternative should John choose? Alternative PV 2 3 John should choose

Explanation / Answer

Answer:

Alternative 1

PV = $251000

Alternative 2

Present value of annuity due of $1: n = 20, i= 7%

PV = $23000 * 11.33560

PV = $260718

Alternative 3

Present value of an ordinary annuity of $1: n = 10, i= 7%

PVA = $72000 * 7.02358

PVA = $505697.76

PV = $505697.76 * 0.54393(present value of $1: n=9, i=7%)

PV = $275064

John should choose alternative 3.

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