Amanda is ready to retire and as a retirement benefit, she can choose to take $380,000 now or $50,000 at the end of each year for a period of 10 years. To compare the two options, she must calculate the present value of both alternatives. She believes a discount rate of 5% would be the most appropriate rate to apply. How much is the present value if she takes the option of $50,000 a year for 10 years? Please refer to the following data, if needed:

Question

Quizplus · Accepted Answer

The present value of $50,000 per year for 10 years at a discount rate of 5% can be calculated using the formula for annuity, which is: 
PV = (C/r) x [1 - (1 + r)^-n]
where PV is the present value, C is the annual cash flow, r is the discount rate, and n is the number of periods.

Substituting the values, we get:
PV = (50,000/0.05) x [1 - (1 + 0.05)^-10]
PV = $386,100

Therefore, taking the option of $50,000 a year for 10 years would give Amanda a higher present value of retirement benefits.

Amanda Is Ready to Retire and as a Retirement Benefit