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2 November, 08:17

You just inherited some money, and a broker offers to sell you an annuity that pays $18,200 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?

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  1. 2 November, 08:34
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    The correct answer is $226,808.4.

    Explanation:

    According to the scenario, the given data are as follows:

    Payment = $18,200

    Time period = 20 years

    Interest rate = 5% = 0.05

    So, we can calculate the annuity by using following formula:

    Present value of annuity=Annuity [1 - (1 + interest rate) ^-time period] / interest rate

    = $18,200 [1 - (1 + 0.05) ^-20] / 0.05

    = $18,200 * 12.46221034

    = $226,808.4

    Hence, the amount you should pay for annuity is $226,808.4.
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