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IV. You want to save $2,000 today for retirement in 40 years. You have to...

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Finance

IV. 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).
(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20% of the total amount withdrawn at retirement.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.
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