Cynthia currently has $55,000 in her RRSP. She plans to contribute $7000 at the end of each year for the next 17 years and then use the accumulated funds to purchase a 20-year annuity making end-of-month payments.
a. Assume that her RRSP earns 8.75% compounded annually for the next 17 years, and the fund from which the annuity is paid will earn 5.4% compounded monthly. What monthly payments will she receive?
b. If the average annual rate of inflation for the next 17 yearsis2 %, what will be the purchasing power in today’s dollars of the monthly payments 17 years from now?