Question

Suppose Becky has her choice of $10,000 at the end of each month for life or a single prize of $1.5 million. She is 35 years old and her life expectancy is 40 more years. (a) Find the present value of the annuity if money is worth 7.2%, compounded monthly. (Hint: In other words, she has chosen to receive $10,000 at the end of each month. So, ignore the $1.5 million for this part. What is the present value of the annuity

Answer 1

The answer is $3,456,000.

Step-by-step explanation:

Annuity is a set amount of money that is paid every year for the person's life. She is 35 years old and expected to live to 75. So for $10,000 at the end of each month, the annuity is, 40 x 12 = 480 months, 480 months x $10,000 = $4,800,000. If we take the $10,000 as the principal amount, and calculate the interest at 7,2% monthly, in 40 years it would be $3,456,000.

I hope this answer helps.