Provide Sue with financial advice on which option has the potential to yield the highest monetary...

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Finance

Provide Sue with financial advice on which option has thepotential to yield the highest monetary value. Support yourrational with calculations using time value of money and comment onthe risk return relationship for each option, assume interest rateon savings is 4% and is compounded semi-annually.
Sue James is a 55-year old accountant who works at Ernst andYoung (EY) who is about to retire. She has the following decisionto make:
Option A – Select a lump sum gratuity payment of $120,000 with areduced pension of $1,750 per month.
Option B – Select a monthly pension of $3,300 with no lump sumgratuity payment.
In addition, Sue has a loan of $72,000 with loan payments of$1,200 per month for the next five years.

Answer & Explanation Solved by verified expert

4.4 Ratings (670 Votes)

A B 1 Pension Received Monthly 1750 3300 2 Pension Received Annually 1750 x12 21000 3300x12 39600 3 Annual Interest received Compounded Semiannually 120000 x 142002 120000 2400 0 0 4 Monthly loan Payment 1200 1200 5 Yearly Loan payment 1200 x 12 14400 1200 x 12 14400 6 Annual Savings 2100014400 6600 3960014400 25200 7 Total after 5 years See Answer

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