Value of a retirement annuity Personal Finance Problem An insurance agent is trying to sell you an annuity, that will provide you with $6 comma 200 at the end of each year for the next 20 years. If you don't purchase this annuity, you can invest your money and earn a return of 4 %. What is the most you would pay for this annuity right now? Ignoring taxes, the most you would pay for this annuity is

The maximum to be paid = $84,260.023

Explanation:

The maximum amount to be paid is the present value of the series of annual cash inflow discounted at the opportunity cost rate of 4% per annum.

This is given in the relationship below:

PV = A * (1 - (1+r) ^ (-n)) / r)

A - annual amount receivable - 6,200. r-rate of return - 4%, n-number of years - 20

PV = 6,200 * (1 - (1+0.04) ^ (-20) / 0.04)

= 6,200 * 13.5903

= $84,260.023

The maximum to be paid = $84,260.023