Question

Chris has just turned 60 and is looking at his retirement options. He’s worked for a public accounting firm for 37 years and the partnership has offered him two pension options: 1. In the first option, Chris retires today and they pay him a retirement income of $30,000 per year. (Although unrealistic, let’s assume that all payments are at the end of the year. So if Chris retires today, his first payment will be at the end of the first year of his retirement.) 2. Under the second option, he would retire today, but defer receiving a retirement income for five years. At that point his retirement income would be $40,000 per year. (To be specific, his first payment would be received at the end of the fifth year.) Actuarial tables suggest Chris will live for 25 more years. (This is the time horizon to use in solving this question.) And his opportunity cost of funds is 5% (which should be used as the discount rate in this question).

Requirement: What is the present value of the first retirement option (round your answer to whole dollars)

the present value of second retirement option? (round your answer to whole dollars)

Which option should Chris choose? (Click to select)

Answer 1

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SOLVED WITH BA II PLUS CALCULATOR