Author Question: You have been given a choice between two retirement policies as described below. Policy A: You will ... (Read 23 times)

vicky · **on:** Jul 10, 2018

You have been given a choice between two retirement policies as described below.
Policy A: You will receive equal annual payments of 10,000 beginning 35 years from now for 10 years.

Policy B: You will receive one lump-sum of 100,000 in 40 years from now.
Which policy would you choose? Assume rate of interest is 6 percent.

Question 2

Nico is 30 years old and will retire at age 65. He will receive retirement benefits, but the benefits are not going to be enough to make a comfortable retirement life for him.

Nico has estimated that an additional 25,000 a year over his retirement benefits will allow him to have a satisfactory life. How much should Nico deposit today in an account paying 6 percent interest to meet his goal? Assume Nico will have 15 years of retirement.

memslove · **Reply #1 on:** Jul 10, 2018

Answer to Question 1

Policy A: present value of the annuity at the beginning of the 35 years from now:
PVA = (10,000/0.06 ) 1-1/(1.06 )10 = 73,600
Policy B: present value of the lump-sum at the beginning of the 35 years from now:
PV = 100,000(1.06 )-5 = 74,726
I will choose policy B.

Answer to Question 2

PMT = 25,000, n = 15, r = 6
PV(65 ) = (25,000/.06 ) 1-1/(1.06 )15 = 242,806
FV = 242,806, n = 35, r = 6
P(30 ) = 242,800(1.06 )-35 = 242,800(0.130 ) = 31,590