table 2: present value of an annuity

Exercise 1 Conrad has just retired. His company's 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"? 3. 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. 4. What is the present value of the second option? (Hint: the sum of question 2-3) 5. Which option would you recommend that he accept? Table1: Present value of $1 Periods 1% 29 0.990 980 0.981 0.951 0.942 0.933 0.923 0.914 0.905 0896 OBA 7 0879 0 870 0.980 0.961 -0.942 0.924 0.906 0.888 0.871 0.853 0.837 0.820 0.804 0.788 0.773 0.758 0.743 0.728 0.714 0.700 0 686 0.673 3% 0.971 0.943 0.915 0.888 0.863 0.837 0.313 0.789 0.766 0.744 0.722 0.701 0.681 0.661 0.642 0.623 0.605 0.587 0.570 0.554 Interest ratesia 4% 5% 6% 0.962 0.952 0.943 0.935 0.925 0.907 0.890 0.873 0.857 0.889 0.884 0.840 0.816 0.794 0.855 0.823 0.792 0.763 0.735 0.822 0.784 0.747 0.713 0.681 0.790.0.746 0705 0.666 0.630 0.750 0.711 0.665 0.623 0.583 0.731 0.677 0.627 0.582 0.540 0.703 0.845 0.592 0.544 0.500 0 576 0.614 0 558 0.508 0.463 0.650 0.585 0.527 0.475 0.429 0.625 0.557 0.497 0.444 0.397 0.601 0.530 0.469 0.415 0.368 0.577 0.505 0.442 0.388 0.340 0.555 0.481 0.417 0.362 0.315 0.534 0.458 0.394 0.3390.292 0.513 0.436 0.371 0.317 0.270 0.494 0.416 0.350 0.296 0.250 0.475 0.396 0 3310 277 0.232 0.456 0377 0.312 0 258 0.215 10 1095 0.909 0.825 0.751 0.683 0621 0.564 0513 0.467 0.424 0.386 0.350 0.319 0917 0.842 0.772 0.708 0.650 0.596 0.547 0.502 0.460 0.422 0.388 0.356 0.326 0.299 0275 0252 0231 0.212 0.194 0.178 0.263 0.239 0.218 0.198 0.180 0.164 0.149 (Interest rate = r, Number of periods = n) nir 1 0 1% 2% 1 3% 4% 5% 6% 7% 8% 9% 10% .9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9346 0.9259 0.9174 09091 1.9704 1.9416 1.9135 1.8861 18594 18334 1.8080 1.7833 1.7591 1.7355 2.9410 2.8839 2.8286 2.7751 2.7232 26730 26243 2.5771 2.531324869 3.9020 3.8077 3.7171 3.6299 3.5460 3.4651 33872 3.3121 3.2397 3 1699 4.85344.71354.5797 4.4518 43295 421244.1002 3.9927 3.8897 3.7908 5.7955 5.6014 5.4172 52421 5.0757 4.9173 4.7665462294.485943553 6.7282 6.4720 6.23036.0021 5.7864 55824 5389352054 5.0330 48684 7.6517 73256 70197 6.7327 6.4632 62098 5.9713 5.7456 5.5348 5.3349 8.5660 8. 1622 7.786174353 7.1078 6.8017 6515262469 5.9952 5.7590 9 47138.9826 8.53028.1109 77217 73601 70236 6.7101 64177 6.1446 10.3676 9.7868 9.2626 8.7605 8.306478869 7.498771390 6 8052 6.4951 11 2551 10.5753 9954093851 8 86338 3838 79427 75361 7.1607 6.8137 12 1337 11 3484 10 6350 9.9856 9 3936 8.8527 8357779038 7.486971034 136037 12.1062 11 2961 10.5631 9.89869.29508.74558.2442 7.786273667 13 8651 12 8493 119379 11.1184 103797 9.71229.107985595 8.0607 76051 14. 7179 13.5777125611 116523108378 10.1059 94466 8,6514 8.3126 78237 15.5623 14 2919 13.1661 12 1657 11 2741 10.4773 9.76329.1216 8.5436 80216 16.3983 149920 13.7535 12 6593 115896, 10827610059193719 8.7556 8.2014 1 7 2260 156785 14 3238 13.1339 120853 11.1581 10 3356 9.6036 8.9501 8.3649 18.0456 16 3514 14 1775 13590312 4622 11 4699 10591098181 91285 8 5136 15 16. 17 19 20