An uncle of yours who is about to retire wants to sell some of his stock and buy an annuity that will provide him with income of $50,000 per year for 30 years, beginning a year from today.The going rate on such annuities is 7.25%.How much would it cost him to buy such an annuity today?
A) $574,924
B) $605,183
C) $635,442
D) $667,214
E) $700,575

Question

Quizplus · Accepted Answer

We can use the present value formula for an annuity to solve for the cost of the annuity today: PV = C * [(1 - (1 / (1 + r)^n)) / r], where PV is the present value, C is the annual cash flow, r is the discount rate (7.25%), and n is the number of periods (30). Plugging in the numbers, we get PV = $50,000 * [(1 - (1 / (1 + 0.0725)^30)) / 0.0725] = $605,183.

An Uncle of Yours Who Is About to Retire Wants