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6 August, 11:10

As a result of a slowdown in operations, Tradewind Stores is offering employees who have been terminated a severance package of $100,000 cash paid today; $50,000 to be paid in one year; and an annuity of $20,000 to be paid each year for 20 years. What is the present value of the package assuming an interest rate of 6 percent?

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  1. 6 August, 12:21
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    PV of $100,000 is $100,000

    PV of $50,000 is $47,170

    PV of $20,000 paid each year is $229,398

    Hence the present value of the package is $376,568

    Explanation:

    The cash paid today has the same present value i. e. $100,000

    The amount of $50,000 which is to be paid next year would have a present value of (taking n=1 and i=6%, we will have the PV factor of 0.9434) $47,170

    And present value of annuity of $20,000 to be paid each year for 20 years will be (taking n=20 and i=6%, we will have the Annuity Factor of 11.4699) $229,398
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