An insurance company offers you an end-of-year annuity of $48,000 per year for the next 20 years. They claim your return on the annuity is 9 percent. What should you be willing to pay today for this annuity?

Question

Quizplus · Accepted Answer

We can use the annuity formula to calculate the present value of the annuity.
PV = C[(1 - (1 / (1 + r)^n)) / r]
where PV is the present value, C is the annual payment, r is the interest rate per period, and n is the number of periods.
Plugging in the given values, we get:
PV = 48,000[(1 - (1 / (1 + 0.09)^20)) / 0.09] = $438,192
Therefore, you should be willing to pay $438,192 today for this annuity.

An Insurance Company Offers You an End-Of-Year Annuity of $48,000