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

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

Quizplus · Accepted Answer

To find the most you should pay for the annuity, we need to calculate the present value of the annuity using the formula:

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

where PV is the present value, PMT is the payment per period, r is the discount rate, and n is the number of periods.

In this case, PMT = $5,000, r = 4.5%, and n = 5. Plugging in these values, we get:

PV = $5,000 x [1 - (1 + 0.045)^(-5)]/0.045 = $22,938

Therefore, the most you should pay for the annuity is $22,938. The correct answer is C.

You Have a Chance to Buy an Annuity That Pays