A new investment opportunity for you is an annuity that pays $550 at the beginning of each year for 3 years. You could earn 5.5%

Question

Len [333]

3 years ago

8

A new investment opportunity for you is an annuity that pays $550 at the beginning of each year for 3 years. You could earn 5.5%

on your money in other investments with equal risk. What is the most you should pay for the annuity?

Business

1 answer:

faltersainse [42] · Answer 1 · 2022-05-17T16:35:03+03:00

Answer:

$1,565.48

Explanation:

This is an annuity due type of question since the recurring payments are made at the beginning of each year unlike Ordinary annuity whose payments occur at the end of each period.

With a financial calculator on beginning mode "BGN", use the following inputs to find the PV;

Total duration of investment; N = 3

Recurring payment; PMT = 550

Interest rate; I/Y = 5.5%

One time cashflows; FV = 0

then compute for Present value ; CPT PV = 1,565.476

Therefore, the most you should pay is $1,565.48