Question

A company offers a bonus retirement plans for its executive employees. The

employees are presented with 2 options.

Option #1: They will start an account $5000 and each year earn 25% on the money

in the account. (i.e. a growth factor of 1.25)

Years Warked

2

Retirement Account $5000.00 $6250 00 $781250

Option #2: They will start an account $5000 and each year and each year there after

continue to add $5000 to the account.

Years Worked

Retirement Account 55000.00 $10,000 $15.000

Which retirement option would be worth more at the end of 20 years?

Option #1

Option #2

They are both equal at 20 years,

Answer 1

option 1

Explanation:

Option 1 . the value after 20 years can be determined using this formula

FV = P (1 + r)^n

FV = Future value

P = Present value

R = interest rate

N = number of years

5000 x (1.25)^20 = $433,680.87

Option 2 = 5,000 x 20 = $100,0000

Option 1 has a higher value in 20 years