Jerry Scott has recently accepted a position with a state agency that has a reti

Question

Jerry Scott has recently accepted a position with a state agency that has a retirement pension plan that requires joint contributions by the employee and the employer. Jerry is now ten years from the retirement age of 65 and expects to contribute $400 per year to the plan, which will make him eligible for payments of $1,000 per year for the remainder of his life, beginning at the age of 65. Jerry's retirement plan is optional; therefore, he is considering the alternative to invest annually an amount equal to his $400 per year contribution. If Jerry assumes his investments would earn 8 percent annually, and his life expectancy is 80 years, should he invest in his own plan or should he make contributions to his employer's fund?

Examine both alternatives and make a recommendation. Show all calculations and explain your reasons. State any assumptions you make.

Explanation / Answer

Since the net present value is positive , yes accept the scheme.

55 -400 0.925926 -370.37037 56 -400 0.857339 -342.935528 57 -400 0.793832 -317.532896 58 -400 0.73503 -294.011941 59 -400 0.680583 -272.233279 60 -400 0.63017 -252.067851 61 -400 0.58349 -233.396158 62 -400 0.540269 -216.107554 63 -400 0.500249 -200.099587 64 -400 0.463193 -185.277395 65 -400 0.428883 -171.553144 66 1000 0.397114 397.113759 67 1000 0.367698 367.697925 68 1000 0.340461 340.461041 69 1000 0.315242 315.241705 70 1000 0.29189 291.890468 71 1000 0.270269 270.268951 72 1000 0.250249 250.249029 73 1000 0.231712 231.712064 74 1000 0.214548 214.548207 75 1000 0.198656 198.655748 76 1000 0.183941 183.940507 77 1000 0.170315 170.315284 78 1000 0.157699 157.699337 79 1000 0.146018 146.017905 80 1000 0.135202 135.201764 815.427991

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