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 $136,000 immediately as her full retirement benefit. Under the second option, she would receive $25,000 each year for 5 years plus a lump-sum payment of $55,000 at the end of the 5-year period.

Required:

1-a. Calculate the present value for the following assuming that the money can be invested at 11%.

1-b. If she can invest money at 11%, which option would you recommend that she accept?

Answer 1

Requirement 1-a
First Option : Receive a lump sum of $136,000 immediately
Present Value $ 136,000
Second Option
year	Receipts	PV Factor @ 11%	Present value
year 1- 5	25,000	3.69590	92,398
year 5	55,000	0.59345	32,640
Present Value			1,25,037
Requirement 1-b
If she can invest money at 11% , first option would recommeded.