An engineering firm has a retirement plan wherein the company will match an empl
ID: 1177101 • Letter: A
Question
An engineering firm has a retirement plan wherein the company will match an employee's stock purchases up to $5,000 per year, provided the employee has been with the firm at least 10 years. If an employee hired 10 years age purchases stock in the maximum amount from the time he started., (a) What was the rate of return on his money if the value of his retirement fund is now $150,000? (b) What was the rate of return on the total invested (i.e., his and the company's money)
150,000=5000(F/A,i%,10), How do I solve for i%?
Explanation / Answer
Annual stock purchase of employee = PMT =5000
Future value = 150,000
Initial investmnet = PV=0
nper = 10Yrs
(a) SO Rate of return = Rate(nper,pmt,pv,fv)
= rate(10,-5000,0,150000)
= 22.92%
Or, we have 5000*FVA(i%,10) = 150,000
ie FVA(i%,10) = 30
So i = 23% approx
(b) If company also matches the contribution, then annual contribution = pmt = 5000+5000=10000
Initial investmnet = PV=0
nper = 10Yrs
And final value Fv = 2*150000= 300,000
So 10000*FVA(i%,10) = 300,000
ie FVA(i%,10) = 30
So i = 22.92% or 23%