Peter is a professor of mathematics at State University. His lifetime avocation has been sailing, and he owns an oceangoing


Peter is a professor of mathematics at State University. His lifetime avocation has been sailing, and he owns an oceangoing sailing vessel. He plans to retire in five years and spend the remainder of his life ‘‘plying’’ the South Pacific, visiting exotic ports of call. Accordingly, in five years, he plans to convert all his assets into a single-life annuity that is payable monthly into a bank account which he can access from anywhere in the world.

He currently owns four residential lots in Miller Beach that he purchased as an investment in 1979 for $6,000. Peter has received an offer of $140,000 for the lots.

He estimates that the lots will appreciate during the next five years at an 11% annual rate.

If he sells the lots, Peter will invest the proceeds in his portfolio of stocks. He invests in growth securities paying negligible dividends that provide their return through appreciation. Peter expects his security portfolio to increase an average of 12% per annum. The risk of real estate in Miller Beach is approximately equal to that of growth stocks.

Peter asks you to evaluate each of the following alternatives and make a recommendation on which course of action he should pursue.

Alternative 1. Sell the beach property now, reinvest the net proceeds in stock, sell the stock in five years, and retire.

Alternative 2. Continue to hold the beach property for another five years, sell the lots, and retire.

An annuity is a series of equal payment made at equal intervals during a period of time. In other words annuity is a contract between insurer and insurance company in which insurer make a lump-sum payment or a series of payment and, in return,...
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...

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Concepts In Federal Taxation

ISBN: 9780324379556

19th Edition

Authors: Kevin E. Murphy, Mark Higgins, Tonya K. Flesher

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Question Posted: March 29, 2013 03:45:10