This Question: 1 pt 7 of 20 This Quiz: 20 ssible Your mom is thinking of retirin

Question

This Question: 1 pt 7 of 20 This Quiz: 20 ssible Your mom is thinking of retiring. Her retirement plan will pay her either $100,000 immediately on retirement or 140,000 five years after the date of her retirement. Which alternative should she choose if the interest rate is: 0% per year? b, 8% per year? c.20% per year? a, 0% per year? If the interest rate is 0% per year, the PV0f the amount to be received five years after retirement is S to the nearest dollar.) Which altermative should your mom take in this case? (Select the best choice below.) (Round O A. Take the money now. b, 8% per year? If the interest rate is 8%, the PV of the amount to be received five years after retirement is S O B. Wait until 5 years after retirement. (Round to the nearest dollar.) Which altermative 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 PV of the amount to be received five years after retirement is SD O B. Wait until 5 years after retirement Round to the nearest dollar.) Which altemative should your mom take in this case? (Select the best choice below.) O A. Take the money now. ,OB. Wait until 5 years after retirement Click to select your answer(s) Save for Later 439 PM A 9/23/2018 Prtsen Home End PgUp PgDn Del Ins F9 F10 F11 F12 Backspa 8 0

Explanation / Answer

a) At 0%, there is no question of time value of money, since the amount received after 5 years will be same in todays value also as becuse the Discounting factor will remain 1.

PV = Cash flow * PVif(r , n)

PV = $140,000 *PVif(0%, 5) i.e.

PV = $140,000 * 1 i.e. $140,000

So the PV will be $140,000 and in this case she should wait for 5 years after retirement.

b) If interest rate is 8%

PV = Cash flow * PVif(r , n)

PV = $140,000 *PVif(8%, 5) i.e.

PV = ($140,000 * 0.6806) i.e. $ 95,282

So the PV will be $95,282 and in this case she should take the money now. As because she is getting today $100,000 which is higher then the value of PV of $140,000.

c. Interest rate = 20%

PV = Cash flow * PVif(r , n)

PV = $140,000 *PVif(20%, 5) i.e.

PV = ($140,000 * 0.4019) i.e. $56,263

So the PV will be $56,263 and in this case she should take the money now. As because she is getting today $100,000 which is higher then the value of PV of $140,000.

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