The Financial Advisor is a weekly column in the local newspaper. Assume you must answer the following question. "I recently retired at age 65, and I have a tax-free retirement annuity coming due soon. I have three options. I can receive (A) $30,976 now, (B) $359.60 per month for the rest of my life, or (C) $513.80 per month for the next 10 years. What should I do?" Ignore the timing of the monthly cash flows and assume that the payments are received at the end of year. Assume the 10-year annuity will continue to be paid to loved heirs if the person dies before the 10-year period is over. Contributed by D. P. Loucks, Cornell University
(a) If i = 6%, develop a choice table for lives from 5 to 30 years. (You do not know how long this person or other readers may live.)
(b) If i = 10%, develop a choice table for lives from 5 to 30 years. (You do not know how long this person or other readers may live.)
(c) How does increasing the interest rate change your recommendations?