Question

Noah wants to buy a 5 year annuity that pays $1000 at the end of each year, starting one year from now. It earns interest at 6.25% compounded annually. How much will it cost him? Include in your answer: -- Calculations for n and - What formula you are using - Answer to the question âº

Answer 1

cost is $4183.87

Explanation:

given data

time t = 5 year

amount A = $1000

rate r = 6.25 % = 0.0625

to find out

how much it will cost

solution

we will apply here formula for present value of annuity that is express as

present value = amount ×
`(1-(1+r)^(-t))/(r)` ....................1

put here all these value we get cost we will pay

present value = amount ×
`(1-(1+r)^(-t))/(r)`

present value = 1000 ×
`(1-(1+0.0625)^(-5))/(0.0625)`

present value = 4183.869221

so cost is $4183.87