Question

You are attempting to price a 25 year annuity due for your insurance company. Payments of $3,500 for this annuity due start at the beginning of each year. The investment team at your company guarantees a return of 8%. What is the lowest price your company should offer?

Answer 1

The lowest price = $40,350.65

Step-by-step explanation:

The lowest price my company should offer is the present value of the annuity discount at the return of 8%.

This will be done using the formula below

PV = A × 1- (1+r)^-n /r

A= 3,500, r= 0,08, n = 24

PV = 3,500× (1-1.08^-24/0.08)

PV = 3,500×10.52875= 36,850.65

Total PV = 3,500 + 36.850.653=40,350.65

The lowest price = $40,350.65

We use 24 years because the first payment occurs at the beginning hence it is already discount