Under the MLB deferred compensation plan, payments made at the end of each year
ID: 2449290 • Letter: U
Question
Under the MLB deferred compensation plan, payments made at the end of each year accumulate up to retirement and then retirees are given two options. Option 1 allows the retiree to select the amount of the annual payment to be received, and option 2 allows the retiree to specify over how many years payments are to be received. Assume Sosa has had $5,000 deposited at the end of each year for 40 years, and that the long-term interest rate has been 7%.
Required:
a. How much has accumulated in Sosa's deferred compensation account?
b. How much will Sosa be able to withdraw at the beginning of each year if he elects to receive payments for 20 years?
c. For how many years will Sosa be able to receive payments if he chooses to receive $115,000 per year at the beginning of each year?
Explanation / Answer
a. How much has accumulated in Sosa's deferred compensation account?
Accumulated in Sosa's deferred compensation account = Annual Deposit*((1+r)^n-1)/r
Accumulated in Sosa's deferred compensation account = 5000*((1+7%)^40-1)/7%
Accumulated in Sosa's deferred compensation account = $ 998,175.56
b. How much will Sosa be able to withdraw at the beginning of each year if he elects to receive payments for 20 years?
Amount to be withdraw each year = pmt(rate,nper,pv,fv,1)
rate= 7%
nper = 20
pv = 998,175.56
fv = 0
Amount to be withdraw each year = pmt(7%,20,-998175.56,0,1)
Amount to be withdraw each year = $ 88,056.74
c. For how many years will Sosa be able to receive payments if he chooses to receive $115,000 per year at the beginning of each year?
No of Year to be withdraw = nper(rate,pmt,pv,fv,1)
rate= 7%
pmt = 115000
pv = 998,175.56
fv = 0
No of Year to be withdraw = nper(7%,115000,-998175.56,0,1)
No of Year to be withdraw = 12.40 Year
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