Gail Trevino expects to receive a $580,000 cash benefit when she retires six yea

Question

Gail Trevino expects to receive a $580,000 cash benefit when she retires six years from today. Ms. Trevino’s employer has offered an early retirement incentive by agreeing to pay her $355,000 today if she agrees to retire immediately. Ms. Trevino desires to earn a rate of return of 8 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)

Required

a.Calculate the present value of the $580,000 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.)

Explanation / Answer

Present value factor

= 1 / (1 + r) ^ n

Where,

r = Rate of interest = 8% or 0.08

n = Time period = 6 years

So, PV Factor

= 1 / (1 + 0.08) ^ 6

= 1 / 1.586874

= 0.63017

So, Present value of $580,000 to be received after 6 years

= Amount to be received x PV Factor

= $580,000 x 0.63017

= $365,498.45

So, $355,000 to be received today is less than $580,000 to be received 6 years later and so $580,000 should be accepted

Related Questions

Navigate

• Browse (All)
• Browse G
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.