The Good Life Insurance Co.wants to sell you an annuity that will pay you $1,000 per quarter for 25 years.You want to earn a minimum rate of return of 5.5 percent.What is the most you are willing to pay as a lump sum today to buy this annuity?

Question

Quizplus · Accepted Answer

The correct answer is A because the present value of an annuity is the sum of the present values of each of the individual payments. The present value of each payment is calculated by dividing the payment by the discount factor, which is (1 + r)^n, where r is the discount rate and n is the number of periods. In this case, the discount rate is 5.5% and the number of periods is 25 * 4 = 100. The present value of each payment is $1,000 / (1.055)^100 = $541.66. The present value of the annuity is the sum of the present values of each of the payments, which is $541.66 * 100 = $54,165.88.