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 S127,000 immediately as her full retirement benefit Under the second option, she would receive 14,000 each year for ten years plus a lump-sum payment of $53,000 at the end of the ten-year period. Click here to view Exhibit 11B-1 and Exhibit 11B-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 11%. (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 Flow Discount Factor Present Value Annual annuity Lump-sum payment Total present value lb. If you can invest money at a 11% return, which option would you prefer? First option O Second option

Explanation / Answer

Compute present value :

1b) First option

Present value of first option Cash flow * Discount factor = Present value Lump sum payment 127000 * 1 = 127000 Present value of second option Cash flow * Discount factor = Present value Annual annuity 14000 * 5.889 = 82446 Lump sum payment 53000 * 0.352 = 18656 Total present value 101102

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