Final answer:
To decide if Sally should purchase the endowment policy offered by Aviva, we must calculate the present value of her payments and compare it to the future value at retirement. Using the 7% interest rate, each payment's present value is determined and then compared to the $60,000 she'll receive at age 63.
Step-by-step explanation:
To determine whether Sally should purchase the endowment policy from Aviva, we need to calculate the present value of the payments she makes and compare it to the future value that she will receive upon retirement. The relevant interest rate given is 7%.
Here is a breakdown of Sally's payments with their respective present values, discounted at a 7% annual interest rate:
- Age 41: $2,000 payment, discounted 1 year
- Age 42: $2,500 payment, discounted 2 years
- Age 43: $3,500 payment, discounted 3 years
- Age 44: $5,000 payment, discounted 4 years
- Age 60: $8,000 payment, discounted 20 years
The future value that Sally will receive at age 63 is $60,000. To find out the present value of this amount, we discount it by 23 years (the period from her current age to when she receives the payout).
If the present value of all her payments is less than $60,000, it would be beneficial for her to invest in the policy.
Example Calculation
Assuming a single payment of $3,000 grows nearly fifteenfold in 40 years at a 7% rate:
3,000(1+.07)40 = $44,923
This illustrates the power of compound interest. Applying similar calculations to Sally's scenario will determine the viability of the endowment policy for her personal financial planning.