Julie has just retired. Her company’s retirement program has two options as to h
ID: 2448160 • 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 $125,000 immediately as her full retirement benefit. Under the second option, she would receive $12,000 each year for eleven years plus a lump-sum payment of $51,000 at the end of the eleven-year period.
1a. Calculate the present value for the following assuming that the money can be invested at 6%
2. If you can invest money at a 6% return, which option would you prefer?
Present Value of First Option Cash Flow × 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 valueExplanation / Answer
Q.No.1
Present value of the first option :
* since money to be recieved immediately, dicount factor to b taken as 1.
In this way option 1, to receive $125,00 immediately is more beneficial.
Q.2: Investment at 6% rate
(ii) Future value at end of 11 year, of annual $12,000 & lump-sum at end of 11year
Present value of the first option Cash flow x Discount factorvat r = Present value of cash flow Lump-sum payment $125,000 1* 125,000Related Questions
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