Question

As a result of a court settlement, an accident victim is awarded $1.8 million. The attorney takes one-third of this amount, another third is used for immediate expenses, and the remaining third is used to set up an annuity. What amount will this annuity pay at the beginning of each quarter for the next 4 years if the annuity earns 7.2%, compounded quarterly?

Solve the problem. (Round your answer to the nearest cent.)

Answer 1

The amount of annuity due at the starting of each quarter equal to the amount of $29,485.

What is an annuity payment?

An annuity refers to a contract between a person and an insurance company in which they make a lump-sum payment and, in return for a regular disbursements, beginning either immediately or at some point in the future.

Because the annuity pay is beginning of each year, then, it is an annuity due. The formula for Periodic Payment when the present value is known is: A = P / {1 - (1 / {(1+i)(N-1)/1 + 1))}

The present value (P):

=$ 1.5/3 million

=$ 0.5 million

=$5 * 105

i = 0.072/4

i = 0.018

N = 5*4

N = 20

x = (1+i)N-1

x = (1+0.018)*19

x = 1.403

A = 5*105 / [ ((1- (1/1.403))/0.018)+1]

A = $29,485. Therefore, the amount of annuity due at the starting of each quarter is $29,485.

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