Your aunt is evaluating her retirement pension.She can retire at age 65 and collect $1,000 per month for the rest of her life.Assume that payments begin one month after her 65^th birthday.If your aunt lives to be exactly 80 years old and can earn 7% interest (compounded monthly),what is the equivalent lump sum she would need at retirement to equal the value of the pension?

Question

Quizplus · Accepted Answer

To find the equivalent lump sum of the pension, we use the formula for the present value of an annuity. Given the monthly payment ($1,000), the interest rate (7% annually, or 0.07/12 monthly), and the number of payments (15 years * 12 months = 180 payments), the present value formula is used to calculate the lump sum needed at retirement to equal the value of the pension. The correct calculation results in a present value of approximately $111,256, making option B the correct answer.

Your Aunt Is Evaluating Her Retirement Pension