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 $133,000 immediately as her full retirement benefit. Under the second option, she would receive $16,000 each year for seven years plus a lump-sum payment of $52,000 at the end of the seven-year period. Click here to view Exhibit 13B-1 and Exhibit 13B-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 12%. (Round discount factor(s) to 3 decimal places.) 1b. If you can invest money at a 12% return, which option would you prefer? First option Second option

Answer 1

1a	Present value for the following assuming that the money can be invested at 12%
	Present value of first option
		Cash Flow	Discount Factor	Present Value
	Lump-sum payment	$133,000	1	$133,000
	Since the lump-sum payment will be received immediately, discount factor to be taken is 1.
	Present value of second option
		Cash Flow	Discount Factor	Present Value
	Annual Annuity	$16,000	4.564	$73,024
	Lump-sum payment	$52,000	0.452	$23,504
	Total Present Value			$96,528
1b	Since the present value of first option is more than second option, We would prefer
	first option