Upon graduation you accept an offer from your dreamed employer. Your employer provides an excellent pension plan. In general, you have two options. One option guarantees an annual retirement benefit that pays a 4% of the last five years of salary times the number of years of service. In the other option, if you put 8% of annual salary to your pension fund, the employer will contribute the same amount to your pension fund during your working years. Suppose your starting salary is $80,000, and you plan to work 20 years before retirement, and you can enjoy the benefit for another 30 years after retirement.

Create two hypothetical scenarios that you would prefer the first pension plan in one scenario and prefer the second in the other. Use numerical examples to illustrate.

Hint:

You may focus on the first choice and calculate the present value of the pension plan on your retirement date.

If you believe more information is needed, feel free to make up your own numbers. For example, you may need to know about the interest rate used to calculate present value.

The present value of the first choice is the threshold. Compare the amount your retirement account has if you choose the second option with this threshold, you get different scenarios during which different options are preferrable.

Again, feel free to make assumptions you think needed.