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March 29, 2017

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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 at the end of each month for 10 years. Alternatively, under option B the employee receives a lump-sum payment equal to the present value of the payments described undeq option A.

(a) find the sum of payments under option A.
(a) find the lump-sum payment under option B if it is determined by using an interest rate of 18% compounded monthly.

  • math - ,

    Option A=1575(120mo.)=189000.

    Option B=189000(r+1)^n
    r=(18/12)/100=0.015=MPR=monthly % rate
    n=(10yr)(12)=120=number of compounding
    periods.

    Option B=189000(1.015)^120=1128000.

  • math - ,

    CORRECTION:

    Option B = 1575(1.015)^120 = 9401.68

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