Question

An insurance agent is trying to sell you an​ annuity, that will provide you with ​$6,500 at the end of each year for the next 15 years. If you​ don't purchase this​ annuity, you can invest your money and earn a return of 7​%. What is the most you would pay for this annuity right​ now?

Answer 1

Annual Payment (P) = $6,500

Number of periods (n) = 15 Years

Interest Rate (n) = 70%

Present Value of annuity = P x [{(1+ r) ⁿ - 1} / r (1+ r) ⁿ]

= $6,500 x [{(1 + 0.07) ¹⁵ - 1} / 0.07 (1 + 0.07) ¹⁵]

= $6,500 x [{2.759031 - 1} / 0.07 (2.759031)]

= $6,500 x [1.759031 / 0.193132]

= $59,201.44

“Therefore, the payment for this annuity right​ now = $59,201.44”