ed 6. Aunt Sally received a letter from Social Security Administration that pres
ID: 2806429 • Letter: E
Question
ed 6. Aunt Sally received a letter from Social Security Administration that present on her retirement. The letter says that her full retirement at age 67, she will receive a monthly payment of $2,900 at the beginning of each month. If she wants to take early retirement at age 62, she will receive 80% of the full retirement payment. Aunt Sally is from a family that lives a long life. She suggested that she is likely to live for 30 years after she retires. If you use a discount rate of 4%, which scenario willvu recommend to your client, andwhy2 (15 mar 7. Refer to question 6, at what discount rate will full retirement or early retirement be computed at the same Present Value. (5 marks) 8. You are in charge of making investment decisions in your company. You are presented with the following three projects: Purchasing a PlantBuilding a Warehouse Buying a machine Capital cost $3,150,000 Capital Cost $3,945,500 Capital Cost $2,980,000 Net Cash inflows Year 1 $630,800 Year 1 $725,000 Year 2 $1,352,250 Year 3 $1,320,540 Year 3 $1,425,000 Year 4 $1,005,350 Net Cash inflows Net Cash inflows Year 1 $715,325 Year 2 $1,342,100 Year 3 S1,101,180 Year 4 $875,675 Year 2 $1,615,300 Year 4 $1,525,450 Ifyour company expects a 10% rate of return on its investment, cormpute the NPV of each project. Which one of the project (if any) will you recommend to your company (5 marks) Why would you recommend the selected project? (5 marks) (i) Gii)Explanation / Answer
If she retires at age 67, present value of the payments at age 62 will be =PV(4%,5,0,PV(4%/12,30*12,2900,0,1))=500933.66
If she retires at age 62, present value of the payments at age 62 will be =PV(4%/12,30*12,80%*2900,0,1)=487569.91
Hence, she should retire at age 67
The present value will be the same at discount rate of 4.564%
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