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Retirement Benefit Options Analysis

The employee has two retirement benefit options from their employer: Option A offers a lump sum payment of $2.5M today, while Option B offers annual payments of $180,000 for 25 years. Calculating the present value of each option at a 6% interest rate, Option A has a higher value of $2.5M compared to $2.439M for Option B. Therefore, the best choice for the employee is Option A to take the lump sum payment immediately.

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Joana Trinidad
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26 views2 pages

Retirement Benefit Options Analysis

The employee has two retirement benefit options from their employer: Option A offers a lump sum payment of $2.5M today, while Option B offers annual payments of $180,000 for 25 years. Calculating the present value of each option at a 6% interest rate, Option A has a higher value of $2.5M compared to $2.439M for Option B. Therefore, the best choice for the employee is Option A to take the lump sum payment immediately.

Uploaded by

Joana Trinidad
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd

You are retiring and your employer is giving you two options on how to receive your retirement benefits.

Option A: Pays a lumpsum of 2.5M today.


Option B: 25 year (BOY) payments of 180,000.

If the interest rate is 6% annually, what option would you choose?

Mathematical Solution Problem Interpretation


Option A Option B The employer gave the employee
PV= 2,500,000 Compoud Interest to be a lumpsum payment of 2,500,
BOY
n= 25 When looking at the net present a
I%= 6 to the employee, for there will be a
PMT= 180,000 option A after 25 years having a 6%
PV= 2,439,064.3550
Real Life Application
Best Choice: Option A Practically thinking, choosing opti
money. In addition, considering the
money will be more beneficial for th
of the future status of the company
getting the lumpsum will be a better

Ethical Consideration
The employer's decision to let its
the time the employee served the c
employees from where they think is
because the company didn't run aw
up to the employees on what to cho
nterpretation
mployer gave the employee two options regarding the retirement benefits to be received, given option A
mpsum payment of 2,500,000 and option B having payments in installment basis for 180,000.

ooking at the net present amounts of the payment, it can be seen that choosing option A will be more beneficial
ployee, for there will be a 60,935.645 increase between the future values of the money from option B to
after 25 years having a 6% interest.

ally thinking, choosing option A is a better option for the employee will immediately get the sum of the
addition, considering the age of people retiring, these people are of old age. Getting the lumpsum of
ll be more beneficial for them because health issues are arising. Furthermore, when thinking
ure status of the company, the uncertainness of being able to continually provide the payments;
e lumpsum will be a better choice.

nsideration
mployer's decision to let its employees choose for their retirement options is ethical. For the reason,
he employee served the company for a long time would be an enough reason to compensate the
s from where they think is more beneficial for them. However, the two options are both ethical
he company didn't run away from its obligation to give what is due to its employees, and it is already
employees on what to choose.

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