Your father is considering purchasing an annuity that pays $5,000 at the beginning of each year for 5 years.He could earn 4.5% on his money in other investments with equal risk.What is the most he should pay for the annuity?
A) 20,701
B) $21,791
C) $22,938
D) $24,085
E) $25,289

Question

Quizplus · Accepted Answer

The most he should pay for the annuity is the present value of the annuity payments. Since the payments are at the beginning of each year, it is 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, r is the interest rate, and n is the number of periods. Plugging in the values: PV = $5,000 × [(1 - (1 + 0.045)^-5) / 0.045] × (1 + 0.045) = $22,938.

Your Father Is Considering Purchasing an Annuity That Pays $5,000