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Question;6-22;REQUIRED ANNUITY PAYMENTS;Assume;that your father is now 50 years old, that he plans to retire in 10 years;and that he expects to live for 25 years after he retires, that is, until he;is 85. He wants a fixed retirement;income that has the same purchasing power at the time he retires as $40,000;has today (he realizes that the real value of his retirement income will;decline year by year after he retires).;His retirement income will begin the day he retires, 10 years from;today, and he will then get 24 additional annual payments. Inflation is expected to be 5 percent per;year from today forward, he currently has $100,000 saved up, and he expects;to earn a return on his savings of 8 percent per year, annual;compounding.;TO;THE NEAREST DOLLAR, HOW MUCH MUST HE SAVE DURING EACH OF THE NEXT 10 YEARS;(WITH DEPOSITS BEING MADE AT THE END OF EACH YEAR) TO MEET HIS RETIREMENT;GOAL?;Information given;1. Will;save for 10 years, then receive payments for 25 years.;2. Wants payments of $40,000 per year in;today?s dollar for first payment only.;Real income;will decline. Inflation will be 5;percent. Therefore, to find the;Inflated fixed payments, we have this time line;6-23;VALUE OF AN ANNUITY;The;prize in last week?s Florida;lottery was estimated to be worth $35 million. If you were lucky enough to win, the state;will pay you $1.75 million per year over the next 20 years. Assume that the first installment is;received immediately.;(a.);If;interest rates are 8 percent, what is the present value of the prize?;(b.);If;interest rates are 8 percent, what is the future value after 20 years?;(c.);6-24;FUTURE VALUE OF AN ANNUITY;Your;client is 40 years old and wants to begin saving for retirement. You advise the client to put $5,000 a year;into the stock market. You estimate;that the market?s return will be, on average, 12 percent a year. Assume the investment will be made at the;end of the year.;(a.);If;the client follows your advice, how much money will she have by age 65?;(b.);How;much will she have by age 70?;How;would your answers changes if the payments were received at the end of each;year?;="msonormal">="msonormal">="msonormal">;6-25;PRESENT VALUE;You;\are serving on a jury. A plaintiff is;suing the city for injuries sustained after falling down an uncovered;manhole. In the trial, doctors testified;that it will be 5 years before the plaintiff is able to return to work. The jury has already decided in favor of;the plaintiff, and has decided to grant the plaintiff an award to cover the;following items;1);Recovery of 2 years of back-pay ($34,000 in 2001 and $36,000 in 2002).;Note: assume that it is December 31, 2002 and that all;salary is received at the year end.;This recovery should include the time value of money.;2);The present value of 5 years of future salary (2003-2007). Assume that the plaintiff?s salary would;increase at a rate of 3 percent per year.;3);$100,000 for pain and suffering.;4);$20,000 for court costs.;5);Assume an interest rate of 7%.;WHAT;SHOULD BE THE SIZE OF THE SETTLEMENT?;="msonormal">="msonormal">="msonormal">="msonormal">="msonormal">="msonormal">="msonormal">="msonormal">="msonormal">="msonormal">="msonormal">="msonormal">="msonormal">="msonormal">="msonormal">="msonormal">="msonormal">="msonormal">="msonormal">


Paper#51287 | Written in 18-Jul-2015

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