Question

You just inherited some money, and a broker offers to sell you an annuity that pays $50,000 at the end of each year for 15 years. You could earn 8.25% on your money in other investments with equal risk. What is the most you should pay for the annuity?

Answer 1

To determine the most you should pay for the annuity, use the present value of an annuity formula.

Step-by-step explanation:

To determine the most you should pay for the annuity, we need to calculate the present value of the annuity payments. This can be done using the present value of an annuity formula:

PV = PMT * [(1 - (1 + r)-n)] / r

Where:

• PV = Present Value
• PMT = Payment per period (in this case, $50,000)
• r = Interest rate per period (in this case, 8.25% or 0.0825)
• n = Number of periods (in this case, 15 years)

Plugging in the values, we get:

PV = $50,000 * [(1 - (1 + 0.0825)-15)] / 0.0825

Solving this equation gives us the present value of the annuity, which represents the most you should pay for it.