Question

Your mom is thinking of retiring. Her retirement plan will pay her either $ 100 comma 000 immediately on retirement or $ 140 comma 000 five years after the date of her retirement. Which alternative should she choose if the interest rate​ is: a. 0 % per​ year? b. 8 % per​ year? c. 20 % per​ year?

Answer 1

a.5 year plan will be chosen.

b.Immediately must be chosen

c.Immediately must be chosen

Step-by-step explanation:

Present value of inflows = cash inflow / (1+r)^n

a. 0 % per​ year

Present value of inflows = $140,000 / (1)⁵

Present value of inflows = $140,000

5 year plan will be chosen.

b. 8 % per​ year

Present value of inflows = $140,000 / (1.08) ⁵

Present value of inflows = $140,000 / 1.469328

Present value of inflows = $95,281.6526

Immediately must be chosen

c. 20 % per​ year?

Present value of inflows = $140,000 / (1.20) ⁵

Present value of inflows = $140,000 / 2.48832

Present value of inflows = $56,262.8601

Immediately must be chosen