Don turned 60 years old today and has retired from Hydro One. Current economic value of his pension is his significant asset. He will be receiving pension payments of $84 000 every year. Based on a 22-year life expectancy and money worth 8% compounded annually and money depreciating at 2% annually, calculate the current economic value of Don's pension.

Question

Quizplus · Accepted Answer

The current economic value of Don's pension can be calculated using the present value of an annuity formula, taking into account both the interest rate and the depreciation rate. The effective interest rate is the difference between the interest rate and the depreciation rate, which is 8% - 2% = 6%. Using the formula for the present value of an annuity: $PV = P \times \frac{1 - (1 + r)^{-n}}{r}$, where P is the payment amount ($84,000), r is the effective interest rate (6% or 0.06), and n is the number of periods (22 years), the calculation is as follows:$$PV = 84,000 \times \frac{1 - (1 + 0.06)^{-22}}{0.06}$$$$PV = 84,000 \times \frac{1 - (1 + 0.06)^{-22}}{0.06} \approx 740,932$$Therefore, the current economic value of Don's pension is approximately $740,932.

Don Turned 60 Years Old Today and Has Retired from Hydro