Answer to Question #260391 in Financial Math for zhidan

Question

Determine the present value of future contributions to a pension plan for a person aged 35, earning 30.000$ per year and expecting to retire at 65. The pension plan requires contributions of 5% of salary and the employee expects to receive average annual salary increases of 3%. Use an annual effective rate of interest of 7% and assume contributions are made at the end of each year.

Answer 1

In the below table, the earnings has been increased by 3% every year from Year1 onwards and 5% Pension contribution is calculated on Earnings each year.

Then the contribution is multiplied by discounting factor @ 7% in order to calculate the present value.

The present value of the contribution is $ 26.31 as per the earnings of $ 30 per year