In: Accounting
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 $150,000 immediately as her full retirement benefit. Under the second option, she would receive $14,000 each year for 20 years plus a lump-sum payment of $60,000 at the end of the 20-year period. Required: 1a. Calculate the present value for the following assuming that the money can be invested at 12%. (Use Microsoft Excel to calculate present values. Do not round intermediate calculations.) 1b. If you can invest money at a 12% return, which option would you prefer? First option Second option
YEAR |
CASH FLOW |
PRESENT VALUE FACTOR @ 12% |
DISCOUNTED CASH FLOW |
1 |
14000 |
0.8928 |
12499.2 |
2 |
14000 |
0.7972 |
11160.8 |
3 |
14000 |
0.7117 |
9963.8 |
4 |
14000 |
0.6355 |
8897 |
5 |
14000 |
0.5674 |
7943.6 |
6 |
14000 |
0.5066 |
7092.4 |
7 |
14000 |
0.4523 |
6332.2 |
8 |
14000 |
0.4039 |
5654.6 |
9 |
14000 |
0.3606 |
5048.4 |
10 |
14000 |
0.322 |
4508 |
11 |
14000 |
0.2875 |
4025 |
12 |
14000 |
0.2567 |
3593.8 |
13 |
14000 |
0.2292 |
3208.8 |
14 |
14000 |
0.2046 |
2864.4 |
15 |
14000 |
0.1827 |
2557.8 |
16 |
14000 |
0.1631 |
2283.4 |
17 |
14000 |
0.1456 |
2038.4 |
18 |
14000 |
0.13 |
1820 |
19 |
14000 |
0.1161 |
1625.4 |
20 |
14000 |
0.1037 |
1451.8 |
20 |
60000 |
0.1037 |
6222 |
110790.8 |
By choosing alternative 1 the present value of amount received will be = $150000
By choosing alternative 2 the present value of amount received will be = $110790
By this we can say that the ALTERNATIVE 1 IS BETTER THAN ALTERNATIVE 2