1) You work for a company that provides a pension plan to which the company contributes 50 percent of the amount you contribute. For example, if you specify that $1000 of your annual salary is to go into the plan, the company will add $500 to make the total contribution $1500 per year. The plan guarantees an annual rate of return of 6%. If you believe you can safely earn 8% per year by investing money yourself, is it worthwhile belonging to the company plan in order to get the company's $500 contribution each year? Assume that you expect to retire in 30 years and that you will set aside $1000 per year at the end of each of the next 30 years regardless of the plan you choose.
2) A lottery offers the winner the choice between $150,000 cash prize or month-end payments of $1000 for 12 ½ years, increasing to $1500 per month for the next 12 ½ years. Which alternative would you choose if money can earn 8.25% compounded monthly over the 25-year period?
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The solution to the two problems is in an excel sheet where I have used excel built-in formulae in my calculations