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Juanita Martinez is ready to retire and has a choice of three pension plans. Pla

ID: 2356989 • Letter: J

Question

Juanita Martinez is ready to retire and has a choice of three pension plans. Plan A provides for an immediate cash payment of $250,000. Plan B provides for the payment of $25,000 per year for 10 years and the payment of $250,000 at the end of year 10. Plan C will pay $42,000 per year for 10 years. Juanita Martinez desires a return of 8 percent. Determine the present value of each plan. (Round present value factor calculations to 4 decimal places, e.g. 0.2525. Round all other calculations and final answer to 0 decimal places, e.g. 5,250.) Present Value Plan A $ Plan B $ Plan C $ Select the best plan.

Explanation / Answer

Juanita Martinez is ready to retire and has a choice of three pension plans. Plan A provides for an immediate cash payment of $250,000.

Plan B provides for the payment of $25,000 per year for 10 years and the payment of $250,000 at the end of year 10.

Plan C will pay $42,000 per year for 10 years. Juanita Martinez desires a return of 8 percent. Determine the present value of each plan. (Round present value factor calculations to 4 decimal places, e.g. 0.2525. Round all other calculations and final answer to 0 decimal places, e.g. 5,250.) Present Value Plan A $ Plan B $ Plan C $ Select the best plan.

Plan A

                                                                                       Total

                                                                                       $250,000

   Plan B

                       Cash                  Present Value

                       Flow                       Factor                   Total

                     $ 25,000                     6.7101                      $167752.5

                      250,000                       .4632                       115800

                                                                                          283552.5

Plan C

                       Cash                  Present Value

                       Flow                       Factor                   Total

                      $42,000                     6.7101                  $ 281824.2

         Plan C should be selected as it has the highest present value.