John Smith is about to retire, and he wants to buy an annuity that will provide...
John Smith is about to retire, and he wants to buy an annuity that will provide him with $50,000 of income per year for 20 years, beginning a year from today. The going rate on such annuities is 10%. How much would it cost him to buy such an annuity today? (Sample Answer: $350,789.25)
Homework Answers
Cost of annuity today is $ 425,678.19
| Present value of annual cash flow | = | Annual cash flow | * | Present value of annuity of 1 | ||
| = | $ 50,000.00 | * | 8.513564 | |||
| = | $ 4,25,678.19 | |||||
| Working: | ||||||
| Present value of annuity of 1 | = | (1-(1+i)^-n)/i | Where, | |||
| = | (1-(1+0.10)^-20)/0.10 | i | = | 10% | ||
| = | 8.51356372 | n | = | 20 | ||
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