An Investor Must Decide Between Putting a One-Time Contribution of $2000

question 52

Multiple Choice

An investor must decide between putting a one-time contribution of $2000 into a regular retirement plan or putting $1,440 into a Roth retirement plan. If the investor's tax rate is 28% now and in retirement, and she expects to earn 12% per year over the next 20 years, which will produce more cash in the end?

• A) the investment in the regular retirement plan
• B) the investment in the Roth retirement plan
• C) both investments will have the same future value after-taxes
• D) the answer cannot be determined from the information given

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Definitions:

Straight-Line Depreciation

An approach to apportion the expense of a tangible resource over its effective life period in consistent annual installments.

Incremental Cash Flow

The additional cash flow a company receives from undertaking a new project, distinct from its existing cash flow.

Lease Payments

Periodic payments made by a lessee to a lessor for the use of an asset, like equipment or real estate, over a specified lease term.