Atlas Insurance wants to sell you an annuity which will pay you $3,400 per quarter for 25 years. You want to earn a minimum rate of return of 6.5 percent. What is the most you are willing to pay as a lump sum today to buy this annuity?

Question

Quizplus · Accepted Answer

We can use the present value formula for an annuity to calculate the maximum amount we are willing to pay:

PV = PMT * ((1- (1+r)^-n)/r)

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

In this case, PMT = $3,400 per quarter, r = 6.5% / 4 = 1.625% per quarter, and n = 25 years * 4 quarters per year = 100 quarters.

Plugging in these values, we get:

PV = $3,400 * ((1- (1+0.01625)^-100)/0.01625) = $167,489.11

Therefore, the most we are willing to pay as a lump sum today to buy this annuity is $167,489.11. The correct answer is C, and the other choices are incorrect.

Atlas Insurance Wants to Sell You an Annuity Which Will