Question

Your father is about to retire, and he wants to buy an annuity that will provide him with $78,000 of income a year for 25 years, with the first payment coming immediately. The going rate on such annuities is 5.15%. How much would it cost him to buy the annuity today

Answer 1

Answer:

The annuity would cost him $1,082,988.93

Explanation:

To find the answer, we use the present value of an annuity formula:

P = A [(1 - (1 + i)^-n )/ i ]

Where:

• P = Present value of the annuity (the value we are looking for)
• A = Value of the annuity payments ($78,000 in this case)
• i = interest rate (in this case 5.15% or 0.0515)
• n = number of compounding periods (in this case: 25 years)

Now, we plug the amounts into the formula and solve:

P = $78,000 [(1 - (1 + 0.0515)^-25)/0.0515]

P = $1,082,988.93