The financial advisor is weekly column in the local newspaper. Assume you must a

Question

The financial advisor is weekly column in the local newspaper. Assume you must answer the following question: “I recently 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. What should I do?” Ignore the timing of the monthly cash flows and assume that the payments are received at the end of year. Asuume the 10-year annuity will continue to be paid to loved heirs if the person dies before the 10- year period is over.

a) If i= 6%, develop a choice table for lives from 5 to 30 years (you do not know how long this person or other readers may live)
b) How does increasing the interest rate change your recommendations?

Explanation / Answer

a)

Once the reader attains the age of 20Yrs, the Option 2 would be beneficial.

(b) The percentage change would be the main concern. If the interest rate increase drastically, then Option 1 would be better.

Table-1 Life 5 Years Option Amount Per Annum PV Factor PV Recommendation Option 1               30,976.00        1.00 30,976.00 Option 2                 4,315.20        4.21 18,177.19 Option 3                 6,165.60        7.36 45,379.35 Recommended

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