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Time Value of Money
Question:
Value of a retirement annuity: An insurance agents is trying to sell you an immediate-retirement annuity,which for a single amount paid today will provide you with $12,000 at the end of each year for the next 25 years. You currently earn 9% on low-risk investment comparable to the retirement annuity. Ignoring taxes,what is the most you would pay for this annuity? My Answer: I=interest, n=year A=FVAn/FVIFAi,n =$12,000/(FVIFA9%,25) =$12,000/84.699 =$141.68 Is it correct? Please help me! |
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No, sorry. The problem is asking for the present value of an annuity. You need to make two adjustments...
(1) Use the table for present value, not future value, of an annuity; (2) You'll multiply, not divide, the annual payment amount by the table factor. Give that a try and see what you get. |
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