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18 April, 02:09

Your father is about to retire, and he wants to buy an annuity that will provide him with $91,000 of income a year for 25 years, with the first payment coming immediately. The going rate on such annuities is 5.15%. How much would it cost him to buy the annuity today

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  1. 18 April, 04:46
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    Present Value of Annuity is $1,263,487

    Explanation:

    A fix Payment for a specified period of time is called annuity. The discounting of these payment on a specified rate is known as present value of annuity.

    Formula for Present value of annuity is as follow

    PV of annuity = P x [ (1 - (1 + r) ^-n) / r ]

    Where

    P = Annual payment = $91,000

    r = rate of return = 5.15%

    n = number of years = 25 years

    PV of annuity = $91,000 x [ (1 - (1 + 0.0515) ^-25) / 0.0515 ]

    PV of Annuity = $1,263,487
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