Suppose you are going to retire at the age of 65 today. For your retirement plan department is offering

Suppose you are going to retire at the age of 65 today. For your retirement plan department is offering the following options:

I.          Receive Rs. 3,500,000 today.

II.   Receive 20 payments of Rs. 192,500 over the next 20 years (the first payment will be at end of this year).

Solution

C=Payment per period = Rs.192,500/-

n = number of payments = 20

i = interest rate = 5% == 0.05

F.V = `C \times (\frac{(1 + i)^n - 1}{i})`

F.V=Rs.192,500`\times (\frac{(1 + 0.05)^20 - 1}{0.05})`

F.V=Rs.192,500 `\times (\frac{(1.05)^20 - 1}{0.05})`

F.V=Rs.192,500 `\times (\frac{2.65 - 1}{0.05})`

F.V=Rs.192,500 `\times (\frac{1.65}{0.05})`

F.V=Rs.192,500 `\times (33)`

F.V=Rs.6,352,500/-

III. Receive Rs. 800,000 today and 15 payments of Rs. 194,000 over the next 15 years (the first payment will be at the end of this year).

Solution

Receive=Rs.800,000/-

C=Payment per period=Rs.194,000/-

i=interest rate 5%=`\frac{5}{100}`=0.05

n=number of payments=15

F.V=`C \times (\frac{(1 + i)^n - 1}{i})`

F.V=Rs.194,000 `\times (\frac{(1 + 0.05)^15 - 1}{0.05} )`

F.V=Rs.194,000 `\times (\frac{(1.05)^15 - 1}{0.05})`

F.V=Rs.194,000 `\times (\frac{2.08 - 1}{0.05})`

F.V=Rs.194,000 `\times (\frac{1.08}{0.05})`

F.V=Rs.194,000 `\times (21.6)`

F.V=Rs.4,190,400

Total Amount=Rs.4,190,400+Rs800,000

Total Amount=Rs.4,990,400/-

You have to choose the best possible option. Whereas, your savings account pays an interest rate of 5% annually.

a) Would you use the Future Value or Present Value to solve this question. Why?

Answer

We use the future value to solve this question because it is the value of assets or investments at the end of a particular time period.

b) Determine which option is best for you.

Answer

I think Option 2 is best for me