Question

An insurance agent is trying to sell you an immediate-retirement annuity, which for a single amount paid today will provide you with R12 000 at the end of each year for the next 25 years. You currently earn 9% on low-risk investments comparable to the retirement annuity. Calculate the most you would pay today.

1. R103 476.97

2. R108 629.85

3. R113 181.83

4. R117 870.96

Answer 1

For this question, we need to find the present value of annuity using the rate which is being earned annually at present. Present value of annuity is the sum of discounted values to be received or paid at equal periodic intervals. It is calculated to find out the equivalent sum of money which we will have today if we receive or pay a certain sum of money periodically.

So, using BA II Plus Financial Calculator, we input the data as follows:

12000 PMT (Annuity)

25 N (years)

9 I/Y (Annual rate)

CPT PV

So, we we will get PV as R 117870.96 (Answer)

R 117870.96 is the maximum amount to be paid today.