The Good Life Insurance Co. wants to sell you an annuity which will pay you $650...

The Good Life Insurance Co. wants to sell you an annuity which will pay you $650 per quarter for 20 years. You want to earn a minimum rate of return of 5.0 percent. What is the most you are willing to pay as a lump sum today to buy this annuity?

Solutions

Expert Solution

Cost of annuity today	=	Annuity amount*Present value of annuity of 1
	=	$ 650	*	50.38666
	=	$ 32,751.33


Working:

Present value of annuity of 1	=	(1-(1+i)^-n)/i			Where,
	=	(1-(1+0.0125)^-80)/0.0125			i	5.0%/4	=	0.0125
	=	50.38666			n	20*4	=	80

jeff jeffy answered 1 year ago

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