10) You just won the Powerball, as a result you have the choice between taking $
ID: 2774598 • Letter: 1
Question
10) You just won the Powerball, as a result you have the choice between taking $250 million today or taking a 20-year annuity. Interest rates are expected to hold at 3.75% over the next 20-years. How much would the annuity need to be annually for you to be indifferent between cash now or taking the annuity? Answer: _________________________
11) (Bonus Question – 5 points) What is the present value of $25,000 received in 10 years if interest rates are 6.5% with continuous compounding? Answer: _________________________
Please show how you got the answer please
Explanation / Answer
Solution.
10.
There are two phases in the life of an annuity. These are the accumulation phase and the annuity payout phase.
The accumulation phase is the period during which it is gathering funds. During the accumulation phase, you make deposits your annuity in whatever form you prefer: Cash, by converting life insurance cash values or by making a 1035 exchange from another annuity (to name a few ways of contributing). If you follow the annuity rules, your annuity will accumulate earnings on a tax-deferred basis until you are ready to make withdrawals.
Just before the age of 60, you can begin the annuity payout phase.
It is possible to withdraw your savings in a lump-sum payment, and this will not incur penalties from the annuity at this point. But you will face severe tax penalties on the savings, so this method is to be avoided unless absolutely necessary.
The other most likely method of withdrawal, for a given period, is the annuitization method. With this option the value of your annuity is paid out over a defined period of time of your choosing, such as 10, 15 or 20 years. Even if you die during this period, the insurance company will continue to make payments to your heirs until the period is over.
An alternative method is the systematic withdrawal schedule. With this method, you can select the amount of payment that you wish to receive each month and the number that you propose to receive. When the payments run out, however, you cease to receive any money. The insurance company will not guarantee that you will not outlive your income payments. You will receive a comfortable sum for a certain period, but it will stop at a certain point.
The annuity payout calculator shows how much you will receive in payment over a certain period of time. You can choose payments annually or per month. You can also supply the inflation rate to the annuity payout calculator to get an idea of what the annuity payout will really worth over the time. The balance schedule below breaks this down.
Annuity need to be $17.99 million annually.
Total interest earned: $109.81 million.
11 . Present value of $25,000.
Present value factore = 6.5%.
Year = 10
P.V of $25,000 = $25,000 x .5327 = $13,317.50
Year Beginning Balance Interest EarnedIn the Period Ending Balance 1. $250.00 $9.38 $241.38 2. $241.38 $9.05 $232.45 3. $232.45 $8.72 $223.17 4. $223.17 $8.37 $213.55 5. $213.55 $8.01 $203.57 6. $203.57 $7.63 $193.21 7. $193.21 $7.25 $182.47 8. $182.47 $6.84 $171.32 9. $171.32 $6.42 $159.75 10. $159.75 $5.99 $147.75 11. $147.75 $5.54 $135.30 12. $135.30 $5.07 $122.39 13. $122.39 $4.59 $108.98 14. $108.98 $4.09 $95.08 15. $95.08 $3.57 $80.66 16. $80.66 $3.02 $65.69 17. $65.69 $2.46 $50.16 18. $50.16 $1.88 $34.05 19. $34.05 $1.28 $17.34 20. $17.34 $0.65 $-0.00
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.