Question

(Present value tables required) Income from an apartment building you own totals $260,000 per year. You plan on selling the building and retiring to France in 12 years. Assuming you can invest the income from the building each year at 3%, how much money will you have on which to retire?

Answer 1

Answer: $2,591,420

Explanation: This investment is an annuity, a type of investment that adds an annual cashflow to the existing amount.

The formula for calculating annuities is:

Present Value = Cashflows X
`(1-(1+r)^(-n))/(r)`

Annual Cashflow = $260,000

r = 3% or 0.03

n = 12 years

Using a present value table, look at the value under the 3% column and in front of the Period 12 row.

This value is 0.701 and the value of
`{(1+r)^(-n)` in the above equation.

PV = $260,000 X
`(1 - 0.701)/(0.03)`

PV = $260,000 X 9.967

$2,591,420