Question

Global Stores is downsizing and must let some employees go. Employees volunteering to leave are being offered a severance package of $ 118,000 cash, another $ 129,000 to be paid in one year, and an annuity of $ 27,500 to be paid each year for six years with the first payment coming at the end of this year. What is the present value of the total severance package, assuming an annual interest rate of 5 % ?

Answer 1

Calculation of Present values of Severance pay                                

Cash Paid Now                                                                                   118000

Present value of the payment                         122857.02(129000*0.95238)    

made 1 year from now            

Present value of Annuity Pay                          139581.475 (27500*5.07569)

Present value                                                         380438

Employees often receive a severance pay at the end of their employment. This is usually based on the length of service the employee is entitled to upon retirement. The Fair Labor Standards Act (FLSA) does not require severance pay.

Some employers choose to provide severance pay to employees who have been dismissed involuntarily or voluntarily. The main reason for offering severance pay is to soften the blow of involuntary layoffs and avoid future lawsuits by having employees sign releases in exchange for severance pay.

Learn more about Severance pay at

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