Question

Value of a retirement annuity Personal Finance Problem An insurance agent is trying to sell you an​ annuity, that will provide you with ​$6 comma 200 at the end of each year for the next 20 years. If you​ don't purchase this​ annuity, you can invest your money and earn a return of 4​%. What is the most you would pay for this annuity right​ now? Ignoring​ taxes, the most you would pay for this annuity is

Answer 1

The maximum to be paid= $84,260.023

Step-by-step explanation:

The maximum amount to be paid is the present value of the series of annual cash inflow discounted at the opportunity cost rate of 4% per annum.

This is given in the relationship below:

PV = A ×( 1- (1+r)^(-n))/r )

A- annual amount receivable- 6,200. r-rate of return - 4%, n-number of years- 20

PV = 6,200 × ( 1 - (1+0.04)^(-20)/0.04)

= 6,200 × 13.5903

= $84,260.023

The maximum to be paid= $84,260.023