John Roberts is 50 years old and has been asked to accept early retirement from

Question

John Roberts is 50 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.):

  

  

Determine the present value, assuming that he is able to invest funds at a 7% rate.

John Roberts is 50 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.):

TABLE 1 Future Value of $1 FV = $1 (1 + i)n TABLE 3 Future Value of an Ordinary Annuity of $1 TABLE 5 Future Value of an Annuity Due of $1 TABLE 2 Present Value of $1 TABLE 4 Present Value of Ordinary Annuity of $1 Table 6 Present Value of an Annuity Due of $1

Explanation / Answer

John should Choose the alternative with the highest present value.

Alternative 1:

PV = $186,000

Alternative 2:

PV = PVA Due = $23000*8.49867 = $195,469.41

Present value of an annuity due of $1: n=12, i=7% (from Table 6)

Alternative 3:

First we find PV of annuity at age of 60 for 10 yrs.

PVA = $59000*7.02358 = $414,391.22

Present value of an ordinary annuity of $1: n=10, i=7% (from Table 4)

Then we find the PV of PVA at end of 55 Yrs.So n=9

PV = $414,391.22*0.54393 =$225,399.82

Present value of $1: n=9, i=7% (from Table 2)

So John should choose alternative 3 with PV = $225,399.82

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