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18 March, 06:46

Kyrie expects to receive a $650,000 cash benefit when he retires 10 years from today. His employer has offered an early retirement package to Kyrie. If Kyrie retires immediately the company will pay him $340,000 today. Assume an appropriate discount rate is 6%. What is the present value of the future retirement benefit and should he accept the offer to retire immediately?

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  1. 18 March, 06:58
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    Answer: If he retires 10 years from now he will receive a retirement benefit of $650,000 and if he retires today he will receive $340,000 today, we need to find out if 650,000 is discounted at 6% for 10 years will its present value be more or less than 340,000. If the present value of 650,000 10 years from now discounted at 6% will be more than 340,000 he should not retire immediately and if the present value is less than 340,000 he should retire immediately.

    Present Value = Future Value / (1+Rate) ^Number of periods

    Future Value = 650,000

    Number of periods = 10

    Rate = 6%

    Present Value = 650,000/1.06^10

    Present Value=362956

    The present Value of 650,000 is more than 340,000 which means that Kyrie should not retire immediately.
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