Question

Noah wants to buy a 5 year annuity that pays $1000 at the end of each year, starting one year from now. It earns interest at 6.25% compounded annually. How much will it cost him? Include in your answer: -- Calculations for n and - What formula you are using - Answer to the question âº

Answer 1

Answer:

cost is $4183.87

Step-by-step explanation:

given data

time t = 5 year

amount A = $1000

rate r = 6.25 %  = 0.0625

to find out

how much it will cost

solution

we will apply here formula for present value of annuity that is express as

present value = amount ×$\frac{1-(1+r)^{-t}}{r}$      ....................1

put here all these value we get cost we will pay

present value = amount ×$\frac{1-(1+r)^{-t}}{r}$

present value = 1000 ×$\frac{1-(1+0.0625)^{-5}}{0.0625}$

present value = 4183.869221

so cost is $4183.87