A new investment opportunity for you is an annuity that pays $550 at the beginning of each year for 3 years.You could earn 5.5% on your money in other investments with equal risk.What is the most you should pay for the annuity?
A) $1,412.84
B) $1,487.20
C) $1,565.48
D) $1,643.75
E) $1,725.94

Question

Quizplus · Accepted Answer

To find the most you should pay for the annuity, you need to calculate the present value of the cash flow.

You can use the formula for the present value of an annuity:

PV = PMT x [(1 - (1 / (1 + r)n)) / r]

where PV is the present value, PMT is the payment amount, r is the interest rate, and n is the number of periods.

In this case, PMT = $550, r = 5.5%, and n = 3. Plugging in these values, we get:

PV = $550 x [(1 - (1 / (1 + 0.055)3)) / 0.055]
PV = $1,565.48

Therefore, the most you should pay for the annuity is $1,565.48.

The correct answer is C.

A New Investment Opportunity for You Is an Annuity That