Explanation Present Value: It refers to the value of an amount today after considering the time value of money and the discounted rate. In other words, it is discounted value of the amount to be received in future. Package A: Given, The amount be received today is $60,000. The present value under package A would remain same as the amount the amount be received today, so the present value under package A is $60,000. Package B: Given, The rate of interest is 5% compounded annually. The number of years is 8 years. The amount to be received at the end of each year is $10,000. The formula to calculate present value of ordinary annuity is: P V = P M T × ( 1 − 1 ( 1 + I ) n I ) Where, PV is the future value. PMT is the period payment. I is the rate of interest. n is the time period. Substitute $10,000 for PMT , 5% for I and 8 for n in the above formula, P V = $ 10 , 000 × ( 1 − 1 ( 1 + 5 % ) 8 5 % ) P V = $ 10 , 000 × 6.46321 = $ 64 , 632.10 The amount of periodic installment is $64,632

Intermediate Accounting Plus Mylab Accounting With Pearson Etext -- Access Card Package (2nd Edition)

2nd Edition

ISBN: 9780134833101

Author: Elizabeth A. Gordon, Jana S. Raedy, Alexander J. Sannella

Publisher: PEARSON

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Tax Deferred Retirement Benefits

It stands for Simplified Employee Pension Individual Retirement Account. This savings plan is for self-employed persons such as independent contractors, freelancers, entrepreneurs, etc. The tax rules of SEP IRA are the same as traditional IRA. Entreprene…

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Chapter 7, Problem 7.6P

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The retirement package that should be chosen by employees.

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Chapter 7 Solutions

Intermediate Accounting Plus Mylab Accounting With Pearson Etext -- Access Card Package (2nd Edition)

Ch. 7 - Prob. 7.1Q Ch. 7 - Prob. 7.2Q Ch. 7 - If interest is compounded more than once a year,...Ch. 7 - Prob. 7.4Q Ch. 7 - Can an ordinary annuity table be used to determine...Ch. 7 - Prob. 7.6Q Ch. 7 - Is the present value of an ordinary annuity more...Ch. 7 - Prob. 7.8Q Ch. 7 - Simple Interest. Assume Shafer Corporation...Ch. 7 - Compound Interest. Assume Shafer Corporation...

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The retirement package that should be chosen by employees.

Solution Summary: The author explains that the present value under package B is greater than other two packages, so employees should choose the package for retirement.

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The retirement package that should be chosen by employees.

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Chapter 7 Solutions