Question

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?

Answer 1

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