Question

You just inherited some money, and a broker offers to sell you an annuity that pays $5,000 at the end of each year for 20 years. You could earn 5% on your money in other investments with equal risk. What is the most you should pay for the annuity?

A. $50,753.
B. $53,424.
C. $56,236.
D. $59,195.
E. $62,311.

Answer 1

most pay for annuity is $62311

option E is correct

Explanation:

given data

annuity A = $5,000

time t = 20 year

rate r = 5%

to find out

most pay for annuity

solution

we will apply here FV formula that is

FV = A×R(1-
`R^(t)`) / (1-R) ...............1

here R = 1/ ( 1+r) = 1/1.05

put here all value in equation 1

FV = A×R(1-
`R^(t)`) / (1-R)

FV = 5000×(1/1.05)×(1-
`(1/0.05)^(20)`) / (1-1/1.05)

Fv = 62311.05

so most pay for annuity is $62311

option E is correct