Question

You just inherited some money, and a broker offers to sell you an annuity that pays $5,000 at the end of each year for 20 years. you could earn 5% on your money in other investments with equal risk. what is the most you should pay for the annuity?

Answer 1

Hi there
Use the formula of the present value of annuity ordinary
The formula is
S=pmt [(1-(1+r)^(-t))÷r)]
S present value?
PMT payment per year 5000
R interest rate 0.05
T time 20

S=5,000×((1−(1+0.05)^(−20))÷(0.05))
S=62,311....answer

Hope it helps