Question

How much would you be willing to pay (rounded to the nearest dollar) for a 20-year ordinary annuity if the payments are $4,500 per year and you want to earn a rate of return equal to 5.5% per year

Answer 1

Answer:

the amount that willing to pay is $53,766

Explanation:

The computation of the amount that willing to pay is shown below:

Price willing to pay is

= $4,500 × {(1+i)^-1 + (1+i)^-2 + (1+i)^-3 + ... + (1+i)^-20} ,

Here i = discount rate =  0.055

= $4,500 × 11.95

= $53,776

Hence, the amount that willing to pay is $53,766

Answer 2

The person would be willing to pay $53,766 in a 20-year ordinary annuity.

What is future value calculation?

The Future value represents the value that current assets would be on a future date. It is measured to identify the worth of an investment made today in the future.    

The formula for future value would be;  

$FV= A*\frac{[(1+i)^n-1]}{i}\\=4,500\frac{(1+0.055)^{-20} }{0.055}\\=4500*11.95\\ =53,776$

Here, i is the interest rate, A is present value, and n is the number of years.  Finally, FA is the future value, which is 53776.

Learn more about future value here:

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