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?
A)$1,412.84
B)$1,487.20
C)$1,565.48
D)$1,643.75

Question

Quizplus · Accepted Answer

The most you should pay for the annuity is the present value of the annuity payments. Since the payments are made at the beginning of each year, it's an annuity due. The present value of an annuity due can be calculated using the formula: PV = PMT * [(1 - (1 + r)^-n) / r] * (1 + r), where PMT is the payment amount, r is the interest rate, and n is the number of periods. Plugging in the values: PV = $550 * [(1 - (1 + 0.055)^-3) / 0.055] * (1 + 0.055) = $1,565.48.

You Have a Chance to Buy an Annuity That Pays