Today is your 20th birthday and you must choose between two retirement options. The first option will provide you with 15 equal annual payments of $75,000 beginning on your 65th birthday. The second option will provide you with one payment of $1,500,000 on your 70th birthday. If the interest rate is 7 percent per year and you are assured of living to at least 80 years of age, what is the present value of the first option (at your 20th birthday)? $56,094.85 $34,801.18 $60,851.13 $21,720.18 $31,981.84?
| First we have to compute the present value on 65th birthday | |||||
| We have to use financial calculator to solve this | |||||
| put in calculator , set calculator at begin mode | |||||
| FV | 0 | ||||
| PMt | -75,000 | ||||
| I | 7% | ||||
| N | 15 | ||||
| Compute PV | $730,910.10 | ||||
| Step - 2 Computation of present value today | |||||
| Present vlaue = | $34,801.18 | ||||
| 730910.10/(1+7%)^45 | |||||
| answer = | $34,801.18 |
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