Your mom is thinking of retiring. Her retirement plan will pay her either $300,0
ID: 2813646 • Letter: Y
Question
Your mom is thinking of retiring. Her retirement plan will pay her either $300,000 immedately on retirement or $420,000 five years after the date of her netirement. Which alternative should she choose if the interest rate is: a.0%per year? b, 8% per year? c.20% per year? a 0%per year? lfthe interest rate is 0% per year, the PVoftheanourt to be received five years after retrement issLJ-pound to the nearest dolar) Which atermative should your mom take in this case? (Select the best choice below. O A. Take the money now b, 8% per yow? lfthe interest rate is 8%, the PV ofthe anunt to be received Sve years after reinement isst (Round to te noarest dolar) Which altenative should your mom take in this case? (Select the best choice below.) O A Take the money now c, 20% per year? "the interest rate is 20%, the PVofte amount to be received fin years "ner retienert iss». (Rardtope nearest dolar) Which altermative should your mom take in this case? (Select the best choice below) OB, Wait ural 5 years aherroti ement O A. Take the money now O B. Wal unti 5 years afer retirementExplanation / Answer
There are two alternatives in this situation i.e. either take $300,000 immediately after retirement or take $420,000 after five years of retirement.
In scenario a, when interest rate is 0% per year, in that case the present value of funds recieved five years after retirement = Future value/(1+r)n
where future value is amount to be recieved after five years, r is interest rate and n is time period
in this case future value = $420,000, r = 0% and n = 5
So Present value = 420000/(1+0)5 = $420,000
We should choose the option which has greater present value
Present value of money take just after retirement = $300,000
So we should take money five years after retirement, as its present value is more.
In scenario b, when interest rate is 8% per year,
Present value = 420000/(1+0.08)5 = $285,845
We should choose the option which has greater present value
Present value of money take just after retirement = $300,000
So we should take money immediately after retirement, as its present value is more.
In scenario c, when interest rate is 20% per year,
Present value = 420000/(1+0.2)5 = $168,789
We should choose the option which has greater present value
Present value of money take just after retirement = $300,000
So we should take money immediately after retirement, as its present value is more.
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