**V. Retirement Savings Decision**You want to save $2,000 today for retirement in 40 years. You have to choose between the two plans listed below:**(i)** Pay no taxes today, put the money in an interest-yielding account, and pay taxes equal to 20% of the total amount withdrawn at retirement. (In the U.S., such an account is known as a regular **individual retirement account**, or **IRA**.)**(ii)** Pay taxes equivalent to 15% of the investment amount today, put the remainder in an interest-yielding account, and pay no taxes when you withdraw your funds at retirement. (In the U.S., this is known as a **Roth IRA**.)**a.** What is the expected present discounted value of each of these plans if the interest rate is 1%? 10%?**b.** Which plan would you choose in each case? Explain your logic clearly.

Roth and Regular IRA's are retirement accounts which are offered by financial institutions to support employees in building their retirement fund. In Roth IRA, tax liability is nullified at investment time whereas in regular IRA, tax liability is deferred to maturity date.V (a) Discounted value for each plan will be as: Result will be as: So, discounted present values will be same as $1,600 for Plan (i) and $1,700 for Plan (ii).V (b) In both cases as either interest rate is 1% or 10%, Plan (ii) (Roth IRA) is better as it is proving higher discounted present value for invested amount. REASON: Form above analysis, it is observed that interest rate is not significant in deciding the choice of IRA but tax rate play an important role. Because present values are same with both interest rates, the difference lies in the tax rate as the present value is just next of tax for invested value. So, the lower tax rate is preferred to get maximum yield with Roth IRA.

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V. You want to save $2,000 today for retirement in 40 years. You have to choose between the two plans listed in (i) and (ii). Pay no taxes today, put the money in an interest-yielding account, and pay taxes equal to 20% of the total amount withdrawn at retirement. (In the U.S., such an account is known as a regular individual retirement account, or IRA.) (ii) (i) Pay taxes equivalent to 15% of the investment amount today, put the remainder in an interest-yielding account, and pay no taxes when you withdraw your funds at retirement. (In the U.S., this is known as a Roth IRA.) a. What is the expected present discounted value of each of these plans if the interest rate is 1%? 10%? b. Which plan would you choose in each case? Explain your logic clearly.

V. You want to save $2,000 today for retirement in 40 years. You have to choose between the two plans listed in (i) and (ii). Pay no taxes today, put the money in an interest-yielding account, and pay taxes equal to 20% of the total amount withdrawn at retirement. (In the U.S., such an account is known as a regular individual retirement account, or IRA.) (ii) (i) Pay taxes equivalent to 15% of the investment amount today, put the remainder in an interest-yielding account, and pay no taxes when you withdraw your funds at retirement. (In the U.S., this is known as a Roth IRA.) a. What is the expected present discounted value of each of these plans if the interest rate is 1%? 10%? b. Which plan would you choose in each case? Explain your logic clearly.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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f you saved your tax refund $14,089.39, quit buying vendor coffee for one year $12,522.23, and decided to contribute $5,040 (you saved $420 per month) in your Roth IRA, how much would you have for retirement if you could invest these savings at 7% compounded annually for 30 years for this one year of savings? (Use the Table 12.1 provided.) Note: Round your answer to two decimal places. Amount saved for Retirement
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Suppose you just won the state lottery, and you have a choice between receiving $2,515,000 today or a 20-year annuity of $220,000, with the first payment coming one year from today. What rate of return is built into the annuity? Disregard taxes. O a. 6.88% O b. 12.96% O c. 6.04% O d. 5.69% O e. 8.75%
Please answer using life-cycle problem. Suppose the interest rate is 5%, the income tax rate 35%, the tax rate on investment income is 20%, and the investment horizon 40 years. (a) What is the final payoff after tax if $100 pre-tax income is invested in a regular savings account? (b) What is the final payoff after tax if $100 pre-tax income is invested in a retirement account? (c) What is the final payoff after tax if $100 pre-tax income is invested in a Roth account?
10) Vanessa wants to withdraw $8,000 each year from July 1, 2025 through July 1, 2029. The investment fund earns interest at a rate of 5%. In order to make these withdrawals, Vanessa will invest an annuity on July 1, 2021 through July 1, 2024. Calculate the annuity Vanessa needs to invest each year. Yellow Company purchases a truck on January 1, 2021. According to the contract Yellow will not make any payments in 2021, 2022 and 2023. Yellow is to make an annuity payment of $5,000 starting December 31, 2024 through December 31, 2028. Calculate the cost of the truck. 11) Stella has $3,000,000 in her investment fund. She wishes to withdraw $338,868 12) at the end of each of the next 13 years. What interest rate must she earn in order to accomplish her goal. A note receivable that is due in 15 months from now is always classified as a 13) long-term asset. (True/False) 14) A long-term note receivable should be disclosed in Other Assets in a classified balance sheet. (True/False)
23. Suppose you just won the state lottery, and you have a choice between receiving $2,550,000 today or a 20-year annuity of $250,000, with the first payment coming one year from today. What rate of return is built into the annuity? Disregard taxes. z 17.22
Please correct answer and don't use hend raiting
v.1
Suppose you just won the state lottery, and you have a choice between receiving $2,625,000 today or a 20-year annuity of $270,000, with the first payment coming one year from today. What rate of return is built into the annuity? Disregard taxes. a. 7.83% b. 10.29% c. 8.13% d. 12.04% e. 9.38%

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