You would like to save $5,000 today, in preparation for retirement 30 years from now. You...

You would like to save $5,000 today, in preparation for retirement 30 years from now. You have to choose between putting it into one of the two plans describe below:

i) Pay no taxes toady, and put the money into an interest-bearing account. When you withdraw the money on retirement, you pay a 20% tax rate on the money taken from the account. (This is how an Individual Retirement Account, or, IRA works)

ii) Pay a tax rate of 15% of the investment amount today, when you put it into the account, but do not pay any tax when you withdraw funds at retirement. The interest rate you get is the same in both plans.

a) What is the expected present discounted value of each of these plans if the interest rate is 1%? What if the interest rate is 10%? (Note: you can do this with a calculator, but it’s going to be easier with a spreadsheet.)

b) Which plan would you choose in each case?

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Expert Solution

jeff jeffy answered 2 hours ago

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