Mr. Alfred Road

Essay specific features

 

Issue:

Business

 

Written by:

Frances W

 

Date added:

April 29, 2012

 

Level:

University

 

Grade:

A

 

No of pages / words:

3 / 799

 

Was viewed:

5046 times

 

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Essay content:

We find the 20-year annuity with present value equal to the value in the account: Present Value = annual payment ? 20-year annuity factor at 9% interest rate: PV = annual payment $180,000 = annual payment ? 9.129 ? Annual payment = $180,000/9.129 = $19,717 Notice that the investment account provides annual income of $19,717, which is more than the annual interest from the account...
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This is because Mr. Road plans to run the account down to zero by the end of his life. So Mr. Road can spend: $19,717 + $600 + $9,000 = $29,317 per year This is comfortably above his current living expenses, which are $2,000 per month or $24,000 annually. The problem of course is inflation. We have mixed up real and nominal flows...
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