You just inherited some money,and a broker offers to sell you an annuity that pays $16,800 at the end of each year for 20 years.You could earn 5% on your money in other investments with equal risk.What is the most you should pay for the annuity?
A) $180,054.02
B) $236,582.60
C) $209,365.13
D) $244,957.21
E) $255,425.46

Question

Quizplus · Accepted Answer

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

PV = C × [(1 - (1 + r)^-n) / r]

where PV is the present value of the annuity, C is the annual cash flow, r is the interest rate, and n is the number of years.

In this case, C = $16,800, r = 5%, and n = 20, so:

PV = $16,800 × [(1 - (1 + 0.05)^-20) / 0.05]
PV = $211,184.87

So, the most you should pay for the annuity is $211,184.87. Therefore, the best choice is C as it is closest to the calculated present value.

You Just Inherited Some Money,and a Broker Offers to Sell