Question

Betty Bronson has just retired after 25 years with the electric company. Her total pension funds have an accumulated value of $350,000, and her life expectancy is 17 more years. Her pension fund manager assumes he can earn a 9 percent return on her assets.

What will be her yearly annuity for the next 17 years? Use Appendix D for an approximate answer, but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

Answer 1

This question requires us to calculate the yearly annuity of Betty for the next 17 years on the basis of the current accumulated wealth in her pension fund. This annuity can be more simply understood as that yearly fixed amount for 17 years whose present value as on today is $350,000.

This can be calculated by using the following formula:

Let the yearly amount of annuity be x

Then x * present value annuity factor (17 years, 9%) = current accumulated value of pension fund

Hence, x * 8.5436 = $350,000

X = 350,000/8.5436= $40,966.

The present value annuity factor (PVAF) can be calculated as follows

PVAF = 1/1.09 + 1/1.09² + 1/1.09³ +.....+ 1/1.09¹⁷

Hope this suffices your purpose.