1. Rachel is currently 55 years old and has a retirement plan where she will receive a 30 year annuity with an annual payment of $50,000 starting in year 10 (at age 65) that will continue until she is 94 years old (30 payments total). There are no further payments after she reaches age 94 and no payments in years 1 through 9. What is the present value of this annuity if she believes an appropriate discount rate is 6% for the first 10 years (up to year 10) and 4% for all of the remaining years?
2. Rachel’s company offers her a “buyout” of her retirement plan. Rachel could elect a lump sum payment of $425,000 and forfeit her right to receiving the annuity in part 1a. What is the level interest rate that the company used to determine this amount? Use the data solver in Excel to determine the interest rate.
3. Which of the two options should Rachel take? Why?