8.00 points Exercise 13A-2 Basic Present Value Concepts [LO13-7 Julie has just r

Question

8.00 points Exercise 13A-2 Basic Present Value Concepts [LO13-7 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 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables Required a. Calculate the present value for the following assuming that the money can be invested at 13%. (Round discount factor(s) to 3 decimal places.) Present Value of First Option Cash Flow x Discount Factor Present Value Lump-sum payment Present Value of Second Option Cash Flow Discount Factor Present Value Annual annuity Lump-sum payment Total present value If you can invest money at a 13% return, which option would you prefer? 1b. First option O Second option

Explanation / Answer

1a) Calculate present value :

1b) If you can invest money at a 13% return First option would prefer.

Present value of first option Cash flow * Discount factor = Present value Lump sum payment 156000 * 1 = 156000 Present value of second option Cash flow * discount factor = Present value Annual Annuity 19000 * 6.462 = 122778 Lump sum payment 64000 * 0.160 = 10240 Total present value 133018

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