Your Father Is About to Retire,and He Wants to Buy

question 52

Multiple Choice

Your father is about to retire,and he wants to buy an annuity that will provide him with $85,000 of income a year for 25 years,with the first payment coming immediately.The going rate on such annuities is 5.15%.How much would it cost him to buy the annuity today?

• A)$1,063,968
• B)$1,119,966
• C)$1,178,912
• D)$1,240,960
• E)$1,303,008

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Definitions:

Conventional Cash Flow

A cash flow pattern characterized by an initial investment outlay followed by a series of positive cash inflows.

Initial Cost

The original outlay or expense associated with acquiring an asset or launching a project, not including operational or maintenance costs.

Internal Rate of Return

The rate of return that brings the total net present value of a project's cash flows to zero.

Investment

Investment is the allocation of resources, typically money, with the expectation of generating an income or profit.