Question

You have a chance to buy an annuity that pays $5,700 at the end of each year for 3 years. You could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity?

Answer 1

$15,378.22

Step-by-step explanation:

The computation of the maximum amount paid for the annuity is shown below:

Present Value Of An Annuity = Cash flow × [1 - (1 + interest rate)^-n] ÷ interest rate]

= $5,700 × [1 - (1 + 0.055)^-3 ÷ 0.055]

= $5700 × [1 - (1.055)^-3 ÷ 0.055]

= $5700 × [(0.1484) ] ÷ 0.055

= $15,378.22

We simply applied the above formula to determine the maximum amount paid for the annuity