If you want to purchase an annuity providing an income of $2000 at the end of each month for five years, how much will it cost if the purchase funds earn 18% compounded monthly?
A) $192,429.30
B) $78,760.54
C) $80,681.00
D) $4886.44
E) $818.60

Question

Quizplus · Accepted Answer

The cost of purchasing an annuity can be calculated using the present value formula for annuities. Given an interest rate of 18% compounded monthly, the monthly interest rate is 18%/12 = 1.5%. The formula for the present value of an annuity is PV = PMT * [(1 - (1 + r)^-n) / r], where PMT is the monthly payment ($2000), r is the monthly interest rate (0.015), and n is the total number of payments (5 years * 12 months = 60 payments). Plugging in the values, we get the present value, which is closest to the amount given in option B.

If You Want to Purchase an Annuity Providing an Income