Question

How much would you be willing to pay (rounded to the nearest dollar) for a 25 -year ordinary annuity if the payments are $6,500 per year and you want to earn a rate of return equal to 5.5% per year?

a)$56,734
b)$53,777
c)$87,190
d)$77,677

Answer 1

To calculate the present value of the annuity, use the formula Present Value = Payment × [(1 - (1 + Interest Rate)^-Number of Periods) / Interest Rate]. The correct answer is option (c) $87,190.

Step-by-step explanation:

To calculate the present value of an ordinary annuity, we can use the formula:

Present Value = Payment × [(1 - (1 + Interest Rate)^-Number of Periods) / Interest Rate]

In this case, the payment is $6,500 per year, the interest rate is 5.5%, and the number of periods is 25 years.

Plugging these values into the formula:

Present Value = 6,500 × [(1 - (1 + 0.055)^-25) / 0.055] ≈ $87,190

Therefore, you would be willing to pay approximately $87,190 rounded to the nearest dollar for a 25-year ordinary annuity with $6,500 payments per year and a desired rate of return of 5.5% per year.