After completing a long and successful career as senior vice president for a lar

Question

After completing a long and successful career as senior vice president for a large bank, you are preparing for retirement. After visiting the human resources office, you have found that you have several retirement options to choose from a. An immediate cash payment of $1.1 million b. Payment of $69,000 per year for life c. Payment of $59,000 per year for 5 years and then $79,000 per year for life (this option is intended to give you some protection against inflation) You believe you can earn 9 percent on your investments and your remaining life expectancy is 10 years. Required: 1. Calculate the net present value of each option. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Enter your answers in dollars but not in millions. Round the final answer to nearest whole dollar.) Net Present Value Option A Option B Option C 2. Determine which option you prefer Option A Option B Option C

Explanation / Answer

Option B:

Present value of $ 69,000 annuity for expected 10 year life:

$ 69,000 x (PVAF, $1, 9 %, 10 years) = $ 69,000 x 6.41766 = $ 442,818.54

Option C:

Present value of $ 59,000 annuity for 5 years:

$ 59,000 x (PVAF, $1, 9 %, 5 years) = $ 59,000 x 3.88965 = $ 229,489.35

Present value of $ 79,000 annuity for remaining expected 5 year life (at 5th year):

$ 79,000 x (PVAF, $1, 9 %, 5 years) = $ 79,000 x 3.88965 = $ 307,282.35

Present value of $ 79,000 annuity for remaining expected 5 year life (now):

$ 307,282.35 x (PV, $ 1, 9%, 5 year) = $ 307,282.35 x 0.6499 = $ 199,702.80

Total = $ 229,489.35 + $ 199,702.80 = $ 429,192.15

Answer:

1.

Net Present value

Option A

$ 1,100,000.00

Option B

$    442,818.54

Option C

$    429,192.15

2.

Option A should be preferred as it is giving more money.

Net Present value

Option A

$ 1,100,000.00

Option B

$    442,818.54

Option C

$    429,192.15

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