Mathematics
posted by Gibbons on .
Suppose an employee of a company is retiring and has the choice of two benefit options under the company pension plan. Option A consists of a guaranteed payment of $1,575,000 at the end of each month for 10 years. Altematively, under option B the employee receives a lumpsum payment equal to the present value of the payments described under option A.
(a) find the sum of the payments under option A.
(b) find the lumpsum payment under option B if it is determined by using an interest rate of 18% compounded monthly.

The monthly payment seems a little high for today's living standards.

a. Option A.1575000 *120mo.=189000000 in 10 yrs.
b. Option B.1.575M @ 18% APR,Compounded
monthly. Pt=Po*(r+1)^n.
Pt=Value at 10 yrs. r=MPR=Monthly percentage rate. n=the number of
interest compounding periods.
r=18/12/100=0.015
n=12*10=120
Pt=1575000*(0.015+1)^120=9401683.52=
Value @ 10yrs.
Evidently, this is not a practical
situation. 
1575000(12mnth*10years)=189,000,000