Question

Stanley has just been advised of a bequest of a lump sum of 180,000 from his Aunt’s will, but it is not due to be available for him for ten years (at t = 10 he will receive $180,000). Stanley wants to receive some cash earlier than this. He is investigating using the bequest to purchase an annuity, in exchange, with the first annual cash flow of the annuity to be received at the end of year 2 (nine cash flows). Assume that the annuity and the lump sum are of equivalent risk and 6.00% pa is the appropriate interest rate (opportunity cost of funds for Stanley). How much is the annual cash flow associated with the annuity?

Answer 1

Stanley has just been advised of a bequest of a lump sum of 180,000 from his Aunt’s will, but it is not due to be available for him for ten years (at t = 10 he will receive $180,000). Stanley wants to receive some cash earlier than this. He is investigating using the bequest to purchase an annuity, in exchange, with the first annual cash flow of the annuity to be received at the end of year 2 (nine cash flows). Assume that the annuity and the lump sum are of equivalent risk and 6.00% pa is the appropriate interest rate (opportunity cost of funds for Stanley). the annual cash flow associated with the annuity is 346800