The second product Suzie represents is an annuity. The customers of this product are typically retirees that use their retirement savings to buy a steady income stream. Like before, there are a range of options for this product, but the most typical arrangement is as follows:

Customers buy this product on their 65th birthday when they retire.

The annuity will make 20 annual payments of $80,000.

The first annual payment of $80,000 will occur on the customers 68th birthday (customers typically rely on their personal savings to travel for the first few years).

For this product, Wagon Financial can invest the customers money at 12% per annum effective.

Using the information provided, answer the following questions.

QUESTION:

f) Suppose that Joseph, an existing customer of this product (with the arrangement specified above), has just received the fifth payment of this annuity.

Using the prospective method, how much money does Wagon Financial need to have set aside today (immediately after the fifth payment is made) to be sure that they can afford to make all future payments to Joseph?

NOTE: Calculations done with the retrospective method will not score any marks.

QUESTION: g) Suppose that immediately after making the fifth payment to Joseph as described above, Wagon Financial also implements a new investment strategy which they believe will yield even higher investment returns than the original 12% per annum.

Assuming this to be true, would Wagon Financial need to set aside more or less money than your answer in part f) to be sure that they can afford to make all future payments to Joseph? Justify your answer.