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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

REQUIRED ANNUITY PAYMENTS Your father is 50 years old and will retire in 10 years. He expects to live for 25 years after he retires, until he is 85. He wants a fixed retirement income value of his retirement income will decline annually after he retires.) His retirement income will begin the day he retires, 10 years from today, at which time he will receive 24 additional annual payments. Annual inflation is expected to be 5%. He currently has $100,000 saved, and he expects to cam 8% annually on his savings. How much must he save during each of the next 10 years (end-of-year deposits) to meet his retirement goal?

Summary Introduction

To calculate: Amount Mr. should save in next 10 years to meet his retirement goal

Annuity: It is an agreement under which a person pays the lump sum payment or number of small transactions and in return he got the amount at later date or upon annuitization. The purpose of annuity is to not the break the flow of income after retirement.

Explanation

Solution:

The required annuity payment is calculated after calculating purchasing power after 10 years at 5% inflation rate,

Given,

Current purchasing power $40,000

Interest rate 5%

Formula to calculate future value of purchasing power,

Futurevalueofpurchasingpower=Currentpurchasingpower×(1+I)N

Where,

  • I is Interest rate
  • N is number of years

Substitute $40,000 for current purchasing power, 5% for I and 10 for number of years,

Purchasingpowerafter10years=$40,000×</

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