3. A company wishing to reduce its staff size has decided to offer certain employees the...
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3. A company wishing to reduce its staff size has decided to offer certain employees the opportunity to take early retirement. One of the eligible employees has decided he would like to retire early. He is 50 years old and has a base salary of $500,000. As an incentive to retire early, the company offered him a choice between (a) a lump sum payment equal to two years' base salary, payable today, or (B) a series of quarterly payments beginning at age 65 and lasting 60 quarters (15 years); during each year the equal quarterly payments will total 30% of the employee's base salary at retirement. Assume the correct discount rate for this analysis is 5% per year, and that if the employee dies before age 80, the remaining payments will be made to his heirs. Should the employee select the lump sum or the deferred annuity? (hint: need to calculate the effective quarterly interest rate for valuation) 3. A company wishing to reduce its staff size has decided to offer certain employees the opportunity to take early retirement. One of the eligible employees has decided he would like to retire early. He is 50 years old and has a base salary of $500,000. As an incentive to retire early, the company offered him a choice between (a) a lump sum payment equal to two years' base salary, payable today, or (B) a series of quarterly payments beginning at age 65 and lasting 60 quarters (15 years); during each year the equal quarterly payments will total 30% of the employee's base salary at retirement. Assume the correct discount rate for this analysis is 5% per year, and that if the employee dies before age 80, the remaining payments will be made to his heirs. Should the employee select the lump sum or the deferred annuity? (hint: need to calculate the effective quarterly interest rate for valuation)
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To compare the two options we need to calculate the present value of each option at retirement age 5... View the full answer
Related Book For
Management Accounting
ISBN: 9780730369387
4th Edition
Authors: Leslie G. Eldenburg, Albie Brooks, Judy Oliver, Gillian Vesty, Rodney Dormer, Vijaya Murthy, Nick Pawsey
Posted Date:
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