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As a result of a slowdown in operations, Tradewind Stores is offering employees who have been terminated a severance package of $100,000 cash paid today; $50,000 to be paid in one year; and an annuity of $20,000 to be paid each year for 20 years. What is the present value of the package assuming an interest rate of 6 percent?

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Answer:

PV of $100,000 is $100,000

PV of $50,000 is $47,170

PV of $20,000 paid each year is $229,398

Hence the present value of the package is $376,568

Explanation:

The cash paid today has the same present value i.e. $100,000

The amount of $50,000 which is to be paid next year would have a present value of (taking n=1 and i=6%, we will have the PV factor of 0.9434) $47,170

And present value of annuity of $20,000 to be paid each year for 20 years will be (taking n=20 and i=6%, we will have the Annuity Factor of 11.4699) $229,398

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