A new investment opportunity for you is an annuity that pays $1,250 at the beginning of...

A new investment opportunity for you is an annuity that pays $1,250 at the beginning of each year for 3 years. You could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity? Select the correct answer.

a. $3,545.30

b. $3,583.10

c. $3,595.70

d. $3,557.90

e. $3,570.50

Solutions

Expert Solution

Given about an annuity,

It pays PMT = $1250 at the beginning of each year for next t = 3 years

interest rate = 5.5%

So, value of this annuity today is calcualted using PV formula of an annuity due:

PV = PMT*(1 - (1+r)^-t)*(1+r)/r = 1250*(1 - 1.055^-3)*1.055/0.055 = $3557.90

So, option d is correct.

jeff jeffy answered 2 years ago

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