1. An employee retiring from a firm after 36 years of service at age 68 has earned a pension of $63,000 per year paid in quarterly payments of $15,750. His expected life expectancy is 12 years further at age 80. The pension payments would end when he dies. a. Given a 16% discount rate based on the investment risk of his employer, what is the lump sum value of the pension when he retires? Excerpts from the Present Value of an Annuity table will help you use the right present value factor. The discount rate is 4% (16% divided by 4) and the present value of an annuity factor at 4% for 48 periods is 21.195.

b. If the employer offered the employee a lump sum payment of $350,000 instead of the pension that he could put into an annuity with the same risk as receiving his employers pension paying 16% interest per year compounded quarterly, should he take it? What risk would the retiring employee have if he does not accept the lump sum?