Assume That You Are 30 Years Old Today, and That

question 3

Multiple Choice

Assume that you are 30 years old today, and that you are planning on retirement at age 65. You expect your salary to be $42,000 one year from now and you also expect your salary to increase at a rate of 5% per year as long as you work. To save for your retirement, you plan on making annual contributions to a retirement account. Your first contribution will be made on your 31st birthday and will be 8% of this year's salary. Likewise, you expect to deposit 8% of your salary each year until you reach age 65. Assume that the rate of interest is 9%. The present value (PV) (at age 30) of your retirement savings is closest to ________.

• A) $61,303
• B) $30,652
• C) $42,912
• D) $67,433

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Definitions:

Expected Inflation

The anticipated rate at which the general level of prices for goods and services will rise over a period of time.

Dividend-payout Ratio

A financial ratio that shows the percentage of a company's earnings paid to shareholders in the form of dividends, reflecting a company's dividend policy.

Anticipated Growth Rate

The expected rate at which a company, asset, or economy is predicted to grow over a certain period of time.

Free Cash Flow

The amount of cash generated by a company after accounting for operating expenses and capital expenditures.