Question

Provide Anne with Financial advice on which option has the potential to yield the highest monetary value.Support your rational with calculations using time value of money and comment on the risk return relationship for each option,assume interest rate on savings is 4 %and is compounded semi annually.

Anne is a 55 year old accountant who works at BDO who is about to retire.She has the following decision to make:

Option A -select a lump sum gratuity payment of $120000 with a reduced pension of $1750 per month.

Option B- select a monthly pension of $3300 with no lump sum gratuity payment.

In addition,Anne has a loan $72000 with loan payments of $1200 per month for the next five years.

Answer 1

Savings Interest (Semi Annually)	4%
Lumpsum Gratuity	120000
Loan Outstanding	72000
EMI	1200	pm
	Option A	Option B		Formula
Monthly Pension	1750	3300
Loan Repayment	0	1200
Amount left from monthly receipts	1750	2100
Accummulated balance every 6 months	10500	12600
Amount at the end of 5 years compounded Semiannually	114972	137966		=FV(0.02,10,-10500,0)	=FV(0.02,10,-12600,0)
PV of the above discounted at 4%	94499	113398	A	=B18/1.04^5	=C18/1.04^5
Lumpsum Gratuity net of Loan repayment	48000	0
Amount at the end of 5 years compounded Semiannually	58512	0		=B20*(1+0.02)^10
PV of the above discounted at 4%	48092.3787	0	B	=B21*1/(1+0.04)^5
Total of the PV's of cashflows	142591	113398	A+B
Hence Option A is beneficial. Repaying the loan upright is wise .