Question

An insurance agent has the following three annuities with the following requirements and payments for your consideration. You could earn 11% in a savings account based on the initial payment or should you instead purchase one or more of the following annuities? QUESTION: What is the value of annuity b? (round to nearest dollar) Initial Payment Amt received per year duration a $50,000 $8,500 12 years b. $60,000 $7,000 25 years c. $70,000 $8,000 20 years Answer:

Answer 1

Given duration (years) Initial Payment 50000 60000 70000 Amt received per year 8500 7000 8000 12 25 20 opportunity cost of capital 11.0% Solution Calculate Present Value of annuity Initial Payment al $50,000 b $60,000 C $70,000 Amt received per year $8,500 $7,000 $8,000 duration (years) 12 25 20 PVAF 6.492 8.422 7.963 Present Value of annuity $55,185 $58,952 $63,707 where, Present Value of annuity = PVAF Amt received per year X PVAF (1+r)^n-1 rX(1+r)^n opportunity cost of capital duration Hence, Annuity a must be purchased as Present Value of annuity is greater than initial payment Value of annuity b is $58952