An insurance settlement of $2.5 million must replace Trixie Eden's income for the next 45 years....

An insurance settlement of $2.5 million must replace Trixie Eden's income for the next 45 years. What income will this settlement provide at the end of each month if it is invested in an annuity that earns 8.1%, compounded monthly?

Expert Solution

In this case we know the PV of Annity is 2500000

Interest rate per month = 8.1/12 = 0.675% per month

Time = 540 months

Monthly payment = ?

PV of annuity = P[1- (1+ r)^-n]/ r

2500000 = X [1- (1+ 0.00675)^-540]/ 0.00675

2500000 = X [1- (1.00675)^-540]/ 0.00675

2500000 = X [1- 0.0264432803315856]/ 0.00675

2500000 = X [0.973556719668414/ 0.00675]

2500000 = X [144.230625136061]

X = 2500000/ 144.230625

= 17333.35

So it will give 17333.35 per month

ekkarill92 answered 2 years ago

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