Question

John Roberts is 55 years old and has been asked to accept early retirement from his company. The company has offered John three alternative compensation packages to induce John to retire: (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

1. $170,000 cash payment to be paid immediately.
2. A 15-year annuity of $20,000 beginning immediately.
3. A 10-year annuity of $60,000 beginning at age 65.

Required:
Determine the present value, assuming that he is able to invest funds at a 9% rate, which alternative should John choose?
  

Answer 1

1) 170000 cash payment is to be immediately,hence there is no requirement for present value
2)
year	cash flows(20000*1.09)	Discount factor @9%	present value
0		1
1	21800	0.917431	20000
2	21800	0.84168	18348.62
3	21800	0.772183	16833.6
4	21800	0.708425	15443.67
5	21800	0.649931	14168.5
6	21800	0.596267	12998.63
7	21800	0.547034	11925.35
8	21800	0.501866	10940.68
9	21800	0.460428	10037.33
10	21800	0.422411	9208.556
11	21800	0.387533	8448.216
12	21800	0.355535	7750.657
13	21800	0.326179	7110.695
14	21800	0.299246	6523.573
15	21800	0.274538	5984.929
Net present value			175723
3)
year	cash flows(60000*1.09)	Discount factor @9%	present value
0		1
1	65400	0.917431	60000
2	65400	0.84168	55045.87
3	65400	0.772183	50500.8
4	65400	0.708425	46331.01
5	65400	0.649931	42505.51
6	65400	0.596267	38995.88
7	65400	0.547034	35776.04
8	65400	0.501866	32822.05
9	65400	0.460428	30111.98
10	65400	0.422411	27625.67
Net present value			419714.8