you are considering the purchase of two different insurance annuities. annuity A will pay $10000 each...

you are considering the purchase of two different insurance annuities. annuity A will pay $10000 each year for eight years. annuity B will pay $8000 per year for 12 years. assuming your money is worth 10% and that each cost the same to purchase today, which annuity would you prefer?

Expert Solution

For Annuity A,

FVA = Annuity x [{1 - (1 + r)^-n} / r]

= $10,000 x [{1.10⁸ - 1} / 0.10] = $10,000 x [1.1436 / 0.10] = $10,000 x 11.4359 = $114,358.88

For Annuity B,

FVA = Annuity x [{1 - (1 + r)^-n} / r]

= $8,000 x [{1.10¹² - 1} / 0.10] = $8,000 x [2.1384 / 0.10] = $8,000 x 21.3843 = $171,074.27

Annuity B would be preferred as it has a higher future value of annuity.

jeff jeffy answered 2 years ago

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