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8 June, 01:24

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?

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  1. 8 June, 01:33
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    a. 5 year plan will be chosen.

    b. Immediately must be chosen

    c. Immediately must be chosen

    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
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