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Question: a company wishing to reduce its headcount has decided to...

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A company wishing to reduce its headcount has decided to offer certain employees the opportunity to take early retirement. One of the eligible employees has decided he would indeed like to retire early. He is 50 years old and has a base salary of $250,000. As an incentive to retire early, the company has offered him a choice between (A) a lump-sum payment equal to two years’ base salary, payable today, or (B) a series of monthly payments beginning at age 65 and lasting 180 months (15 years); during each year, the monthly payments will be total 30% of the base salary at retirement. Assume the discount rate (APR) is 4% per year, compounded monthly, and that if the employee dies before age 80, the remaining payments will be made to his heirs. Should the employee select the lump sum or the deferred annuity?

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