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After receiving a reward for information leading to the arrest of a notorious criminal, you are considering investing it in an annuity that pays $5,000 at the end of each year for 20 years. You could earn 5% on your money in other investments with equal risk. What is the most you should pay for the annuity

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Shahzaibfaraz

Answer:

The maximum that should be paid for this annuity today is $62311.05

Explanation:

To calculate the maximum that should be paid for the annuity, we will calculate the present value of annuity. As the cash flow from annuity occur at the end of the period, it is an ordinary annuity. The formula for the present value of ordinary annuity is attached.

Present value = 5000 * [ 1 - (1+0.05)^-20 / 0.05 ]

Present value = $62311.05171 rounded off to $62311.05

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