You have a chance to buy an annuity that pays $5,000 at the beginning of each year for 5 years.You could earn 4.5% on your money in other investments with equal risk.What is the most you should pay for the annuity?
A)$20,701
B)$21,791
C)$22,938
D)$24,085
E)$25,289

Question

Quizplus · Accepted Answer

The present value of an annuity due can be calculated using the formula for the present value of an annuity due. The present value of an annuity due is higher than an ordinary annuity because payments are received at the beginning of each period. Using the formula PV = Pmt * [(1 - (1 + r)^-n) / r] * (1 + r), where Pmt = $5,000, r = 4.5% or 0.045, and n = 5, the calculation gives approximately $22,938.

You Have a Chance to Buy an Annuity That Pays