Ella has just retired and has received a lump sum pay-out of $1,800,000. Sheinvests part of this pay-out in a perpetual investment which earns 4% per annumand provides a perpetual income to her of $30,000 per year (assuming end-of-yearwithdrawals). She puts the rest of the pay out in another investment in the form ofa growing perpetuity (growth rate of 2% pa) which earns 4% pa. She wants tomake annual withdrawals (starting in one year) from this growing perpetuity tofund some holidays.Required(i) Calculate how much Ella has invested in the perpetual investment.(ii) Show how much extra Ella can expect to spend each year (assuming end-of-year withdrawals), over and above the $30,000 from the perpetual investment,from the growing perpetuity. Note: ignore tax in your calculations.

Perpetuity is the special form of annuity in which payments are received forever.

Answered: lla has just retired and has received a…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Melissa agrees to contribute $500 to the alumni fund at the end of each year for the next 7 years. Shannon wants to match Melissa's gift, but he wants to make a lump-sum contribution. If the current interest rate is 2.5% compounded annually, how much should Shannon contribute to equal Melissa's gift? (Round your answer to the nearest cent.) $
The AGI of the Newtons, a married couple, is $199,000 this year. They would like to contribute to a Roth IRA. a. What is the maximum amount this couple can contribute to a Roth IRA? b. Now Supposed that the Newtons will report AGI of less than $196,000 and put $12,000 each year into their Roth IRA for 20 years, earning an annual return of 5%. What future value will accumulate in their Roth at the end of this period?
Your evil step-uncle wishes to leave you some of his wealth. You must choose how he wills the money to you. OptionA: He ‘gives’ you $1000.00. He will invest the money on your behalf, at 7.5% per annum, compounded monthly. He will add $1000 to the account at the end of each year. At his death the accumulated sum will pass to you. Option B: He ‘gives’ you $2000.00 per year until he dies. This money is not invested, and the accumulated sum will pass to you at his death. a) If you knew Uncle was going to die in 5 years, which option would you choose? How much money would you inherit from Option A? From Option B? b) If you knew Uncle was going to die in 20 years, which option would you choose? How much money would you inherit from Option A? From Option B?
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