Chapter 2 Time value

Question 12

Miller is 63 years old and retired. He wishes to provide retirement income for
himself and is considering an annuity contract with the Philo Life Insurance
Company. Such a contract pays him an equal-dollar amount each year that he
lives. For this cash-flow stream, he must put up a specific amount of money at
the beginning. According to actuary tables, his life expectancy is 15 years, and
that is the duration on which the insurance company bases its calculations
regardless of how long he actually lives. a. If Philo Life uses a compound
annual interest rate of 5 percent in its calculations, what must Cohen pay at
the outset for an annuity to provide him with $10,000 per year? (Assume that
the expected annual payments are at the end of each of the 15 years.)

Solution

Q12
No. Of Cash Present Value At Present Value At
Yeas Flow Rate 5% 10% Pv @ 5%

1 10000 5% ($9,523.81) ($9,090.91) ($28,571.43)

2 10000 5% ($9,070.29) ($8,264.46) ($27,210.88)
3 10000 5% ($8,638.38) ($7,513.15) ($25,915.13)
4 10000 5% ($8,227.02) ($6,830.13) ($24,681.07)
5 10000 5% ($7,835.26) ($6,209.21) ($23,505.78)
6 10000 5% ($7,462.15) ($5,644.74) ($22,386.46)
7 10000 5% ($7,106.81) ($5,131.58) ($21,320.44)
8 10000 5% ($6,768.39) ($4,665.07) ($20,305.18)
9 10000 5% ($6,446.09) ($4,240.98) ($19,338.27)
10 10000 5% ($6,139.13) ($3,855.43) ($18,417.40)
11 10000 5% ($5,846.79) ($3,504.94) ($17,540.38)
12 10000 5% ($5,568.37) ($3,186.31) ($16,705.12)
13 10000 5% ($5,303.21) ($2,896.64) ($15,909.64)
14 10000 5% ($5,050.68) ($2,633.31) ($15,152.04)
15 10000 5% ($4,810.17) ($2,393.92) ($14,430.51)
Total ($103,796.58) ($76,060.80)