Question

As a result of a slowdown in operations, Tradewind Stores is offering employees who have been terminated a severance package of $101,000 cash paid today; $101,000 to be paid in one year; and an annuity of $28,000 to be paid each year for 5 years. What is the present value of the package assuming an interest rate of 11 percent? (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. Round the final answer to nearest whole dollar.)

Answer 1

Year	Cashflow (a)	PVF@11% (b)	Amount (axb)
Year 0	101000	1	(101000)
Year 1	28000	0.9009	25225.2
Year 2	28000	0.8116	22724.8
Year 3	28000	0.7312	20473.6
Year 4	28000	0.6587	18443.6
Year 5	28000	0.5935	16618
Net Present value of the package	2485.20

as the above NPV of the package is positive it means it better for employees to take through annuity to be paid end of each year for 5 years.

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