On the 40th birthday, Mr. Ramos decided to buy a pension plan for himself. This plan will allow him to claim P10,000.00 quarterly for 5 years starting 3 months after his 60th birthday. What one-time payment should he make on his
40th birthday to pay off his pension plan, if the interest rate is 8% compounded quarterly?​

The amount of one-time payment should he make on his 40th birthday to pay off his pension plan is P32,880.77.

Step-by-step explanation:

Step 1: Calculation of present value on 3 months after his 60th birthday

The present value on 3 months after his 60th birthday can be calculated using the formula for calculating the present value of an ordinary annuity as follows:

PV60 = Q * ((1 - (1 / (1 + r))^n) / r) …………………………………. (1)

Where;

PV60 = present value on 3 months after his 60th birthday = ?

Q = quarterly claim = P10,000

r = quarterly interest rate = annual interest rate / 4 = 8% / 4 = 0.08 / 4 = 0.02

n = number of quarters = number of years * Number of quarters in a year = 5 * 4 = 20

Substitute the values into equation (1), we have:

PV60 =  P10,000 * ((1 - (1 / (1 + 0.02))^20) / 0.02)

PV60 = P10,000 * 16.3514333445971

PV60 = P163,514.33  

Step 2: Calculation of one-time payment on his 40th birthday

The one-time payment can be calculated using the formula the following formula:

PV = PV60 / (1 + r)^n (2)

Where;

PV = Present value or One-time payment = ?

PV60 = present value on 3 months after his 60th birthday = P163,514.33

r = quarterly interest rate = annual interest rate / 4 = 8% / 4 = 0.08 / 4 = 0.02

n = number of quarters from 40th to 3 months after his 60th birthday = (number of years * Number of quarters in a year) + One quarter = (20 * 4) + 1 = 81

Substitute the values into equation (2), we have:

PV = P163,514.33 / (1 + 0.02)^81 = P32,880.77

Therefore, the amount of one-time payment should he make on his 40th birthday to pay off his pension plan is P32,880.77.

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step-by-step explanation:

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