Question

Your friend offers to pay you an annuity of $2,900 at the end of each year for 3 years in return for cash today. You could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity? Select the correct answer.

 a. $7,834.61 b. $7,829.31 c. $7,824.01 d. $7,818.71 e. $7,813.41.

Answer 1

Option c is correct

Calculatio of Present value of annuity

P = Periodic Payment = $2,900

r = interest rate = 5.5%

n= 3 years

Present value of annuity = P [1 - (1+r)^-n]/r

= $2,900 [1 - (1+5.5%)^-3] / 5.5%

= $2,900 [ 1- 0.85161366418] / 0.055

= $430.320373867 / 0.055

= $7,824.00679758

= $7,824.01

Therefore, present value of annuity = $7,824.01