Conrad has just retired. His companys retirement program has three options as to how retirement benefits can be received. Under the first option, Conrad would receive a lump sum of $200,000 immediately as his full retirement benefit. Under the second option, he would receive $16,000 each year for 20 years plus a lump-sum payment of $65,000 at the end of the 20-year period.
Required: If he can invest money at 7%, Use present value analysis to determine the following:
1. What is the present value of the first option?
2. For the second option, what is the present value of $16,000 each year for 20 years? For the second option, what is the present value of a lump-sum payment of $65,000 at the end of the 20-year period.
3. What is the present value of the second option? (Hint: the sum of question 2.)
4. Which option would you recommend that he accept?
Table1: Present value of $1 Periods 1% 8 OU AWNS 0.990 0.980 0.971 0.961 0.951 0.942 0.933 0.923 0.914 0.905 | 0.896 | 0.887 0.879 0.870 0.861 0.853 10.844 | 0.836 1 0.828 10.820 Interest rates d 3% 5% 96% 0.980 0.971 0.962 0.952 0.9430.935 0.9610.943 0.925 0.907 0.890 0.873 0.942 0.915 0.8890.864 0,840 0.816 0.924 0.888 0.855 0.823 0.792 0.763 0.906 0.8630.822 0.784 0.747 0.713 0.888 0.837 0.790 0.746 0705 0.666 0.871 0.813 0.760 0.211 0.665 0.623 0.853 0.789 0.731 0.677 0.627 0.582 0.837 0.766 0.703 0.645 0,592 0.544 0.820 0.744 0.676 0.614 0.558 0.508 0.804 0.722 0.650 0.585 0.527 0.475 0.788 0.701 0.625 0.557 0.4970 444 0.773 0.681 0.601 0.530 0.469 0.415 0.758 0.661 0.577 0.505 0.442 0.388 0.743 0642 0.555 0.481 0.417 0.362 0.7280 .623 0.534- 0.458 0.394 0.339 0.714 0.605 0.513 0.436 0.371 0.317 0.700 0.587 940.416 0.350 0.296 0.686 0.570 0.475 0.396 0.331 0.673 0.554 0.456 0.377 0.3120.258 9% 0.926 0.917 0.8570.842 0.794 0.772 0.7350.708 0.681 0.650 0.630 0.596 0.583 0.547 0.540 0.502 0.500 0.460 0.463 0.422 0.429 0.388 0.397 0.356 0.368 0.326 0.340 0.299 0.315 0.275 0.292 0.252 0.270 0.231 0.250 0.212 10% 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467 0.424 0.386 0.350 0.319 0.290 0.263 0.239 0.218 0.198 0.180 0.164 0.194 18 20 0.215 Table2: Present value of an annuity (Interest rate = r, Number of periods = n) nir 1% 1 0 .9901 |2 | 1.9704 3 2.9410 3.9020 5 4 .8534 5.7955 7 6 .7282 8 7 .6517 9 8 .5660 10 9 .4713 1110.3676 * 12 11.2551 13 12.1337 13.0037 15 . 13.8651 16 1 4.7179 15.5623 181 16.3983 19 1 7.2260 20 1 8.0456 2% 3% 4% 5% 6% 7% 8% 9% 10% 0.9804 0.9709 0.9615 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 1.9416 1.9135 1.8861 1.85941.83341.8080 1.7833 1.7591 1.7355 2.8839 2.8286 2.7751 2.7232 2.6730 2.6243 2.5771 2.5313 2.4869 3.8077 3.7171 3.6299 3.5460 3.4651 3.3872 3.3121 3.2397 3.1699 4.7135 4.5797 4.4518 4.32954.2124 4.10023.9927 3.8897 3.7908 5.6014 5.4172 5.2421 5,0757 4.9173 4.7665 4.6229 4.4859 4 3553 6.4720 6.2303 6.0021 5.78645.5824 5.3893 5.2064 5.0330 4.8684 7.3255 7,01976.7327 6.4632 6.2098 5.9713 5.7466 5.5348 5.3349 8.16227.7861 7.4353 7 1078 6.8017 6.5152 6.2469 5.9952 5.7590 8.9826 8.5302 8.1109 7.721773601 7.0236 6.7101 6.4177 6.1446 9.7868 9.2526 8.76058.3064788697.49877.13906.8052 6.4951 10.5753 9.9540 9.3851 88633 8.3838 79427 7.5361 7.1607 6.8137 11.3484 10.6350 9.9856 9.3936 8.8527 8.35777.9038 7.4869 7.1034 12.1062 11.2961 10.5631 9.8986 929508.7455 8.2442 7.7862 7.3667 12.8493 11.9379 11.1184 10.3797 9.7122 9.1079 8.5595 8.06077 6061 13.5777 12.5611 11.6523 10.8378 10.1059 9.4466 8.8514 8.3126 7.8237 14.291913.1661 12.1657 11.2741 10.4773 9.7632 9.1216 8.5436 8.0216 14.9920 13.7535 12.6593 11.6896 10.8276 10.0591 9.3719 8.7556 8.2014 14 3238 15.6785 13.1339 12.0853 11.1581 10.33569.6036 8.9501 8.3649 16.3514 14.8775 13 5903 12.4622 11.4699 10.5940 9.8181 9.1285 8.5136
