The question is incomplete. The complete question is stated below,
You would like to have enough money saved after your retirement such that you and your heirs can receive $100,000 per year in perpetuity. How much would you need to have saved at the time of your retirement in order to achieve this goal? (Assume that the perpetuity payments start one year after the date of your retirement. The annual interest rate is 12.5 percent.)
Answer:
At the time of retirement, the amount that needs to be saved for this perpetuity should be $800000
Step-by-step explanation:
A perpetuity is a series of constant cash flows that occur after equal intervals of time for an indefinite time period. Thus, it is a series of perpetual cash flows. To calculate the amount that need to be saved at the time of retirement to receive a perpetuity of $100000 per year starting from one year after the retirement, we need to calculate the present value of the perpetuity. The formula for the present value of the perpetuity is,
Present value of perpetuity = CF / r
Where,
- CF is cash flow or constant payment by perpetuity
- r is the required rate or return or the interest rate
Present value of perpetuity = 100000 / 0.125
Present value of perpetuity = $800000