Question

Under the MLB deferred compensation plan, payments made at the end of each year accumulate up to retirement and then retirees are given two options. Option 1 allows the retiree to select the amount of the annual payment to be received, and option 2 allows the retiree to specify over how many years payments are to be received. Assume Sosa has had $5,000 deposited at the end of each year for 40 years, and that the long-term interest rate has been 7%. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: a. How much has accumulated in Sosa's deferred compensation account? b. How much will Sosa be able to withdraw at the beginning of each year if he elects to receive payments for 20 years? c. For how many years will Sosa be able to receive payments if he chooses to receive $115,000 per year at the beginning of each year?

a. Balance in Fund __

b. Withdrawal Amount___

c. Receive payment ____ years

Answer 1

Solution:

Solution a) Calculation of fund accumulated in Sosa's deferred compensation account.

Following are the steps to be followed on Microsoft Excel to calculate the Future Value:

Step 1: Click on "FORMULAS" tab at the top of Microsoft Excel
Step 2: Select the option "Financial"
Step 3: Under "Financial" select the option "FV"
Step 4: Insert Rate = 0.07 Nper = 40 PMT = -5000

FV = $998,175.56

Therefore, the fund accumulated in Sosa's deferred compensation account after 40 years is $998,175.56

Solution b) Calculation of the amount Sosa will be able to withdraw at the beginning of each year if he elects to receive payments for 20 years

Following are the steps to be followed on Microsoft Excel to calculate the yearly withdrawal amount:

Step 1: Click on "FORMULAS" tab at the top of Microsoft Excel
Step 2: Select the option "Financial"
Step 3: Under "Financial" select the option "PMT"
Step 4: Insert Rate = 0.07 Nper = 20 PV = -998,175.56 Type = 1

PMT = $88,056.74

Therefore, the amount Sosa will be able to withdraw at the beginning of each year if he elects to receive payments for 20 years is $88,056.74

Solution c) Calculation of number of years Sosa will be able to receive payments if he chooses to receive $115,000 per year at the beginning of each year

Following are the steps to be followed on Microsoft Excel to calculate the number of years:

Step 1: Click on "FORMULAS" tab at the top of Microsoft Excel
Step 2: Select the option "Financial"
Step 3: Under "Financial" select the option NPER"
Step 4: Insert Rate = 0.07 PMT = 115000 PV = -998,175.56 Type = 1

NPER = 12.40

Therefore, Sosa will be able to withdraw $115,000 at the beginning of each year for 12.40 Years.