You have a chance to buy 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?

Question

Quizplus · Accepted Answer

To find the price of the annuity, we need to calculate the present value of the future cash flows. Here's how to do it using the formula for the present value of an annuity:
PV = C * [(1 - (1 + r)^(-n)) / r]
where PV is the present value, C is the annual payment, r is the discount rate, and n is the number of years.

Plugging in the numbers from the problem, we get:
PV = 550 * [(1 - (1 + 0.055)^(-3)) / 0.055]
PV = $1,565.48

So the most you should pay for the annuity is $1,565.48. Choice C is the correct answer.

You Have a Chance to Buy an Annuity That Pays