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Scott plans to retire in 30 years when he has enough money to buy a perpetuity. Suppose the perpetuity pays $50,000 per year with an interest rate of 12%. How much must Scott save in order to retire if the perpetuity makes its first payment in 31 years.

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facundobuzzetti

Answer:

Scott must save 416,666.67 at the moment of retirement.

Explanation:

Giving the following information:

Cash flow (Cf)= $50,000

Interest rate= 12%

To calculate the value of the perpetuity at the moment of retirement, we need to use the following formula:

PV= Cf/ (i - g)

Cf= 50,000

i= 0.12

g= 0

PV= 50,000 / 0.12

PV= $416,666.67

Scott must save 416,666.67 at the moment of retirement.

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