Question

A customer has a younger brother with severe learning disabilities who is unable to work. The customer wishes to invest enough money to provide $2,500 a month in perpetuity to pay for the brother's ongoing living expenses. Upon the death of the disabled brother, the intact principal amount will be given to the customer's children. Assuming that the principal can be invested at a 5% annual rate of return, the required principal amount is:

Answer 1

Answer:

$600000

Explanation:

This case can be achieved through Perpetuity Annuity, Annuity that pay for 20 years at least.

2500 x 12 = $30000 annually

For 20 years = $600000

So if the principal of $600000 can be invested into an Annuity policy, then the payback amount of $2,500 per month for life is guaranteed although 20 years payment upfront are accepted. Investment will be made on such money to enable such financial institution to pay back the monthly payment as pre-contract agreement

Answer 2

Answer:

$600,000

Explanation:

A customer has a younger brother with severe learning disabilities who is unable to work. The customer wishes to invest enough money to provide $2,500 a month in perpetuity to pay for the brother's ongoing living expenses. Upon the death of the disabled brother, the intact principal amount will be given to the customer's children. Assuming that the principal can be invested at a 5% annual rate of return, the required principal amount is $600,000