The Good Life Insurance Co. wants to sell you an annuity which will pay you $680 per quarter for 20 years. You want to earn a minimum rate of return of 5.3 percent. What is the most you are willing to pay as a lump sum today to buy this annuity?
Annuity Present Value:
The present value of an annuity is the simple sum of discounted values of all future periodic payments. The discount rate is dependent on the cash flow risk of the annuity and varies directly with the risk.
Answer and Explanation: 1
The most you should be willing to pay is E. $33,416.18
The formula for the present value of annuity can be represented as:
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Learn more about this topic:
fromChapter 8 / Lesson 3
Learn how to find present value of annuity using the formula and see its derivation. Study its examples and see a difference between Ordinary Annuity and Annuity Due.