Question

Your grandfather is retiring at the end of next year. He would like to ensure that his heirs receive payments of $11,600 a year forever, starting when he retires. If he can earn 12.0 percent annually, how much does your grandfather need to invest to produce the desired cash flow? (Round answer to 2 decimal places e.g. 15.25.)

Answer 1

To produce the desired cash flow of $11,600 per year, your grandfather needs to invest approximately $96,666.67.

Step-by-step explanation:

To calculate how much your grandfather needs to invest to produce the desired cash flow, we can use the formula for the present value of an annuity. The formula is:

PV = CF / r

Where:

• PV is the present value
• CF is the cash flow (which is $11,600 per year)
• r is the interest rate (which is 12.0% or 0.12)

Using this formula, we can plug in the values to find the present value:

PV = $11,600 / 0.12 = $96,666.67

Therefore, your grandfather needs to invest approximately $96,666.67 to produce the desired cash flow.