Julie has just retired. Her company’s retirement program has two options as to h
ID: 2410507 • Letter: J
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 $150,000 immediately as her full retirement benefit. Under the second option, she would receive $14,000 each year for 20 years plus a lump-sum payment of $60,000 at the end of the 20-year period. Required: 1a. Calculate the present value for the following assuming that the money can be invested at 12%. (Use Microsoft Excel to calculate present values. Do not round intermediate calculations.) 1b. If you can invest money at a 12% return, which option would you prefer? First option Second option
Explanation / Answer
YEAR
CASH FLOW
PRESENT VALUE FACTOR @ 12%
DISCOUNTED CASH FLOW
1
14000
0.8928
12499.2
2
14000
0.7972
11160.8
3
14000
0.7117
9963.8
4
14000
0.6355
8897
5
14000
0.5674
7943.6
6
14000
0.5066
7092.4
7
14000
0.4523
6332.2
8
14000
0.4039
5654.6
9
14000
0.3606
5048.4
10
14000
0.322
4508
11
14000
0.2875
4025
12
14000
0.2567
3593.8
13
14000
0.2292
3208.8
14
14000
0.2046
2864.4
15
14000
0.1827
2557.8
16
14000
0.1631
2283.4
17
14000
0.1456
2038.4
18
14000
0.13
1820
19
14000
0.1161
1625.4
20
14000
0.1037
1451.8
20
60000
0.1037
6222
110790.8
By choosing alternative 1 the present value of amount received will be = $150000
By choosing alternative 2 the present value of amount received will be = $110790
By this we can say that the ALTERNATIVE 1 IS BETTER THAN ALTERNATIVE 2
YEAR
CASH FLOW
PRESENT VALUE FACTOR @ 12%
DISCOUNTED CASH FLOW
1
14000
0.8928
12499.2
2
14000
0.7972
11160.8
3
14000
0.7117
9963.8
4
14000
0.6355
8897
5
14000
0.5674
7943.6
6
14000
0.5066
7092.4
7
14000
0.4523
6332.2
8
14000
0.4039
5654.6
9
14000
0.3606
5048.4
10
14000
0.322
4508
11
14000
0.2875
4025
12
14000
0.2567
3593.8
13
14000
0.2292
3208.8
14
14000
0.2046
2864.4
15
14000
0.1827
2557.8
16
14000
0.1631
2283.4
17
14000
0.1456
2038.4
18
14000
0.13
1820
19
14000
0.1161
1625.4
20
14000
0.1037
1451.8
20
60000
0.1037
6222
110790.8
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