Reference no: EM132525894

Obrien Group wishes to accumulate funds to provide a retirement annuity for its Director of Research, Peter Alexander; Mr. Alexander by contract will retire at the end of exactly 12 years. On retirement, he is entitled to receive an annual end-of-year payment of $42,000 for exactly 20 years. If he dies prior to the end of the 20-year period, the annual payments will pass to his heirs. During the 12-year 'accumulation period', Obrien wishes to fund the annuity by making equal annual end-of-year deposits into an account earning 9 percent interest. Once the 20-year 'distribution period' begins, Obrien plans to move the accumulated monies into an account earning a guaranteed 12 percent per year. At the end of the distribution period the account balance will equal zero. Note the first deposit will be made at the end of year 1 and the first distribution payment will be received at the end of year 13.

Required:

Question 1: What is the time value of money? Explain using the above scenario and draw a timeline depicting all the Cash flows associated with Obrien's view of the retirement annuity.