Question

8- The Financial Advisor is a weekly column in the local newspaper. Assume you must answer the following question. "I recently 36 retired at age 65, and I have a tax-free retirement annuity coming due soon. I have three options. I can receive (A) $30,976 now, (B) $359.60 per month for the rest of my life, or (C) $513.80 per month for the next 10 years. Fer option C if I die within 10 years, payments continue to my heirs. My interest rate is 9%. What should I do? Ignore the timing of the monthly cash flows and assume that the payments are received at the end of year. Contributed by D. P. Loucks, Cornell University (a) Develop a choice table for life spans from age 66 to 100. (b) If remaining life is 20 years and i = 9%, use an incremental rate of return analysis to recommend which option should be chosen.

please use excel

Answer 1

Answer (a) Age OS Present Value of all options Rate @ 9% Total PV Option (a) Option (b) Option (c) 30976 45597.95 39568.71 Cash Inflow at Option (a) PV Option (b) PV Option (c) PV 65 YO 30976 30976 0 0 0 66 Y1 0 4315.2 3958.90 6165.6 5656.51 67|Y2 0 4315.2 3632.02 6165.6 5189.46 68/Y3 0 4315.2 3332.13 6165.6 4760.971 69144 0 4315.2 3057.00 6165.6 4367.87 70 Y5 0 4315.2 2804.58 6165.6 4007.22 71lY6 0 4315.2 2573.01 6165.6 3676.35 72147 0 4315.2 2360.56 6165.61 3372.79 73|Y8 0 4315.2 2165.65 6165.6 3094.31 74179 0 4315.2 1986.84 6165.6 2838.81 751410 0 4315.2 1822.79 6165.6 2604.42 76 711 0 4315.2 1672.28 0 77|Y12 0 4315.2 1534.20 0 78 Y13 0 4315.2 1407.53 0 791414 0 4315.2 1291.31 0 80 Y15 0 4315.2 1184.69 0 81/Y16 0 4315.2 1086.87 0 82 Y17 0 4315.2 997.13 0 83|Y18 0 4315.2 914.80 0 84 Y19 0 4315.2 839.26 0 85Y20 0 4315.2 769.96 0 86 Y21 0 4315.2 706.39 0 87 Y22 0 4315.2 648.06 0 881Y23 0 4315.2 594.55 0 89 Y24 0 4315.2 545.46 0 901425 0 4315.2 500.42 0 91 Y26 0 4315.2 459.10 0 92 Y27 0 4315.2 421.20 0 93|Y28 0 4315.2 386.42 0 941729 0 4315.2 354.51 0 95Y30 0 4315.2 325.24 0 96/Y31 0 4315.2 298.39 0 97Y32 0 4315.2 273.75 0 981Y33 0 4315.2 251.15 0 991Y34 0 4315.2 230.41 0 100 Y35 0 4315.2 211.38 0 Option B is better, as you will receive $ 45597.95 Answer (b) Age Present Value of all options Rate @ 9% Total PV Option (a) Option (b) Option (c) 30976 39391.50 39568.71 Cash Inflow at Option (a) PV Option (b) PV Option (c) PV 65 YO 30976 30976 0 0 0 0 66 Y1 0 4315.2 3958.90 6165.6 5656.51 67 Y2 0 4315.2 3632.02 6165.6 5189.46 68/Y3 0 4315.2 3332.13 6165.6 4760.971 691Y4 0 4315.2 3057.00 6165.6 4367.87 70 Y5 0 4315.2 2804.58 6165.6 4007.22 71lY6 0 4315.2 2573.01 6165.6 3676.35 72147 0 4315.2 2360.56 6165.6 3372.79 73|Y8 0 4315.2 2165.65 6165.6 3094.31) 74|Y9 0 4315.2 1986.84 6165.6 2838.81 75|Y10 0 4315.2 1822.79 6165.6 2604.42 76Y11 0 4315.2 1672.28 0 77|Y12 0 4315.2 1534.20 0 78 Y13 0 4315.2 1407.53 0 79|Y14 0 4315.2 1291.31 0 80 Y15 0 4315.2 1184.69 0 81 Y16 0 4315.2 1086.87 0 82 417 0 4315.2 997.13 0 83|Y18 0 4315.2 914.80 0 84 Y19 0 4315.2 839.26 0 85/Y20 0 4315.20 769.96 0 Option C is better, as you will receive $ 39568.71

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