Question

Assume that you are offered an annuity that pays $100 at the end of each year for 10 years. You could earn 8% on your money in other investments with equal risk. What is the most you should pay for the annuity

Answer 1

The annuity is worth $671.01

Step-by-step explanation:

Giving the following information:

Cash flow= $100

The number of years= 10 years.

Interest rate= 8%

To calculate the value of the annuity, we need to calculate the present value.

First, we need to calculate the final value:

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

A= annual cash

FV= {100*[(1.08^10)-1]} / 0.08

FV= $1,448.66

Now, the present value:

PV=FV/(1+i)^n

PV= 1,448.66/(1.08^10)

PV= $671.01