Final answer:
To determine Ms. Walters' required present value to receive an annual income of $245,000 for 28 years at a 12% return, the present value of an annuity formula should be applied. This formula considers the effect of compound interest and can be used to calculate how capital grows or reduces in value over time. None of the given answer choices may be correct without the exact calculation.
Step-by-step explanation:
The student is asking how much Ms. Walters needs to put down today to receive an annual income of $245,000 for the next 28 years at an average rate of return of 12 percent. This is a calculation that can be done using the present value of an annuity formula. The formula needed to calculate the present value of an annuity is PV = PMT * ((1 - (1 + r)^-n) / r), where PMT is the annual payment, r is the rate of return per period, and n is the number of periods.
To find the present value that Ms. Walters needs today, we would set PMT as $245,000, r as 0.12 (12 percent), and n as 28. By substituting these values into the formula and solving for PV, we would arrive at the present value amount needed today for Ms. Walters to receive her desired annual income for 28 years. Note that each potential answer is an independent calculation and in this case, none of the given options might be the correct one.
One must consider the effect of compound interest over time, which can either increase the value of savings or decrease the purchasing power of money due to inflation. For example, an initial savings of $3,000 at a 7% annual rate of return will grow significantly over 40 years.