Julie has just retired. Her company\'s retirement program has two options as to

Question

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 118-1 and Exhibit 118-2, to determine the appropriate discount factor(s) using tables. Required: 1a Calculate the present value for the following assuming that the money can be invested at 13%. Use the appropriate table to determine the discount factor(s).) Present Value of First Option Cash Flow Discount Factor-Present Value Lump-sum payment Present Value of Second Option Cash FlowDiscount FactorPresent Value Annual annuity Lump-sum payment Total present value 1b If you can invest money at a 13% return, which option would you prefer? O First option Second option

Explanation / Answer

1a)since in the first problem payment is recited today itself in lumpsum so the present value factor will be 1 only and present value will be=156000×1=156000

2b)2nd step has 2 steps an annuity as well as lumpsum payment in 15 years

So pv of lumpsum value of 64000 at 13% pa for 15 years= 64000/(1.13)^15=10233

And pv annuity of annunity of 19000 for 15 years=P*(1-(1+R)^-N)/R

=19000 (1-(1+.13)^-15)/.13=122785.20

Therefor total PV under 2nd method=10233+122785.20=133018.20

Therefore payment under lumpsum method using fist option results in higher value

Note it has been assumed that the employee retired today itself since no other date is given

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