Question

Suppose a 65-year-old person wants to purchase an annuity from an insurance company that would pay $20,900 per year until the end of that person’s life. The insurance company expects this person to live for 15 more years and would be willing to pay 5 percent on the annuity. How much should the insurance company ask this person to pay for the annuity?

Answer 1

PV= $216,935

Step-by-step explanation:

Giving the following information:

Suppose a 65-year-old person wants to purchase an annuity from an insurance company that would pay $20,900 per year until the end of that person’s life. The insurance company expects this person to live for 15 more.

First, we need to find the final value of the annuity.

FV= {A*[(1+i)^n-1]}/i

A= annual deposit

FV= {20,900*[(1.05^15)-1]}/0.05= 450,992

Now, we can find the present value.

PV= FV/ (1+i)^n= 450,992/1.05^15= $216,935