finance data bank
622
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:
623
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.)

How would your answers changes if the payments were received at the end of each year? 
625
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 backpay ($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 (20032007). 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? 

Rating:
5/
Solution: finance data bank