Question

A man is disabled in an accident and wants to receive an insurance payment that will provide him with $1600 at the end of each month for 5 years, if the payment can be replaced in an account that pays 6% compounded monthly, what size payment should he seek?

Answer 1

The man should seek a payment size of approximately $239.67.

Step-by-step explanation:

To calculate the size of payment the man should seek, we can use the formula for the future value of an annuity:

FV = P * ((1 + r)^n - 1) / r

Where FV is the future value, P is the payment amount, r is the interest rate per period (in this case, 6% divided by 12), and n is the number of periods (in this case, 5 years multiplied by 12).

Plugging in the given values, we have:

FV = 1600 * ((1 + 0.06/12)^(5*12) - 1) / (0.06/12)

Solving the equation results in:

FV = 1600 * (1.005)^60 * 239.6657

Therefore, the man should seek a payment size of approximately $239.67.