Question

4. Your employer contributes $300 a quarter to your retirement plan. Assume
that you work for your employer for another 27 years and that the applicable discount
rate is 6.0 percent. Given these assumptions, what is this employee benefit worth to you
today?

Answer 1

The amount is computed as shown below:

Present value = Quarterly deposits x [ (1 – 1 / (1 + r)ⁿ) / r ]

r is computed as follows:

= 6% / 4 (Since the contribution is on quarterly basis, hence divided by 4)

= 1.5% or 0.015

n is computed as follows:

= 27 x 4 (Since the contribution is on quarterly basis, hence multiplied by 4)

= 108

So, the amount will be computed as follows:

= $ 300 x [ (1 - 1 / (1 + 0.015)¹⁰⁸ ) / 0.015 ]

= $ 300 x 53.31374879

= $ 15,994.12 Approximately

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