Question

Your father is about to retire, and he wants to buy an annuity that will provide him with $91,000 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

Answer 1

Answer:

Present Value of Annuity is $1,263,487

Explanation:

A fix Payment for a specified period of time is called annuity. The discounting of these payment on a specified rate is known as present value of annuity.

Formula for Present value of annuity is as follow

PV of annuity = P x [ ( 1- ( 1+ r )^-n ) / r ]

Where

P = Annual payment = $91,000

r = rate of return = 5.15%

n = number of years = 25 years

PV of annuity = $91,000 x [ ( 1- ( 1+ 0.0515 )^-25 ) / 0.0515 ]

PV of Annuity = $1,263,487