You just inherited some money, and a broker offers to sell you an annuity that pays $18,200 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?

Question

Talia Haas

Business

14 January, 08:32

You just inherited some money, and a broker offers to sell you an annuity that pays $18,200 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?

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Answers (1)

Know the Answer?

Lexi Cline · Answer 1

The correct answer is $226,808.4.

Explanation:

According to the scenario, the given data are as follows:

Payment = $18,200

Time period = 20 years

Interest rate = 5% = 0.05

So, we can calculate the annuity by using following formula:

Present value of annuity=Annuity [1 - (1 + interest rate) ^-time period] / interest rate

= $18,200 [1 - (1 + 0.05) ^-20] / 0.05

= $18,200 * 12.46221034

= $226,808.4

Hence, the amount you should pay for annuity is $226,808.4.