Your father is about to retire, and he wants to buy an annuity that will provide him with $78,000 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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Business

Dyer

18 January, 15:31

Your father is about to retire, and he wants to buy an annuity that will provide him with $78,000 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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Answers (1)

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Kianna Grant · Answer 1

The annuity would cost him $1,082,988.93

Explanation:

To find the answer, we use the present value of an annuity formula:

P = A [ (1 - (1 + i) ^-n) / i ]

Where:

P = Present value of the annuity (the value we are looking for) A = Value of the annuity payments ($78,000 in this case) i = interest rate (in this case 5.15% or 0.0515) n = number of compounding periods (in this case: 25 years)

Now, we plug the amounts into the formula and solve:

P = $78,000 [ (1 - (1 + 0.0515) ^-25) / 0.0515]

P = $1,082,988.93