Question

It would mean so much to me if it was explained as to how you can get the answer using the ba ii plus financial calculator. Thank you. My professor is not being helpful with these types of problems. He brings a whole different set of problems than what he has provided for the practice handouts for the quiz questions. Your help will be very much appreciated. I would like to learn the steps.

1. At retirement (tomorrow) your employer will ask you to make the following choice between cash-out options in your retirement plan. You may have either a) a pension that gives you a check for $1500 at the beginning of every month for the rest of your life (your life expectancy is 20 years) or b) a lump sum payment of $200,000. If you believe that you will only be capable of investing the lump sum at a rate of 7% per year for the remainder of your life, which is the better choice?
2. At retirement (tomorrow) your employer will ask you to make the following choice between cash-out options in your retirement plan. You may have either a) a pension that gives you a check for $1000 at the beginning of every month for the rest of your life (your life expectancy is 15 years) or b) a lump sum payment of $100,000. If you believe that you will only be capable of investing the lump sum at a rate of 7% per year for the remainder of your life, which is the better choice?
3. You wish to purchase a big screen TV in 5 years. The TV costs $2000 today. If inflation averages 2% per year over the next 5 years, and you have $500 saved right now toward this goal, how much money will you have to set aside each month in order to meet this goal within your stated time frame? Assume your money will grow at an annual rate of 6% per year, and that you will make your deposits at the end of each month
4. You are currently 40 years old. In an effort to provide a lifetime income stream, you are discussing the purchase of a deferred annuity with an insurance company sales representative. If the contract promises to pay you $2000 each month, at the beginning of the month, for the remainder of your life, how much should you be willing to pay for this contract? Assume payments will begin at your age 65, your life expectancy at that time will be 25 years and that the appropriate discount rate is 7%. Ignore commissions, profits and expense charges.
5. Linda’s goal is to buy a used car that is 5 years old at the time of purchase and to make this purchase three years from now. She currently has $5000 set aside for this goal. Cars that are currently five years old are selling for about $7500 today. How much money will she have to save per month to buy a five-year old auto in three years if she can get a 5% annual return on her money and inflation is expected to be 4% for the next three years?

Answer 1

1) In order to know whether the Annuity payment received after retirement is beneficial or taking the lump sum amount will be beneficial, we will calculate the present value of annuity received considering the rate of interest to be similar as that a person would get by investing the lump sum amount.

Annuity Value per month (pmt) = $ 1,500

Life expectancy = 20 years

Life expectancy in months (nper) = 240 Months (12 * 20)

Rate = 7%

Monthly rate (rate) = 7 / 12

= 0.58%

Using the PV function in excel sheet we can calculate the present value of Annuity as follows:

Formulas used in the excel sheet are:

So, the PV of Annuity is $ 194,602.36 which is less than the lumpsum payment of $200,000. Therefore it will be beneficial to take lumpsum payment option.

2) In order to know whether the Annuity payment received after retirement is beneficial or taking the lump sum amount will be beneficial, we will calculate the present value of annuity received considering the rate of interest to be similar as that a person would get by investing the lump sum amount.

Annuity Value per month (pmt) = $ 1,000

Life expectancy = 15 years

Life expectancy in months (nper) = 180 Months (12 * 20)

Rate = 7%

Monthly rate (rate) = 7 / 12

= 0.58%

Formulas used in the excel sheet are:

So, the PV of Annuity is $ 111,904.95 which is more than the lumpsum payment of $100,000. Therefore it will be beneficial to take monthly annuity payment option.

As there are multiple questions asked, I have solved the first 2 questions. Please post the remaining questions separately for rest parts to be answered. Hope it helps you !!