lyssa just bought a 10-year ordinary annuity that promises to pay $1,500 at the

Question

lyssa just bought a 10-year ordinary annuity that promises to pay $1,500 at the end of each of the next 10 years .If the interest rate for this annuity is 7.9% . 1) what is the present value of this annuity ? 2) lyssa has a option of extending her annuity another 10 years .If she pays more money today .she can continue to receive $1,500 per year for another ten years .How much more should she be willing to pay to extend her annuity ? 3) How much would this annuity be worth if it paid 1500 at the end of each year forever?

Explanation / Answer

1) PV = 1500/(1+r) +1500/(1+r)^2+1500/(1+r)^3 ...1500/(1+r)^10 = 1500*6.7405= $10110.75 2) if we calculate the present value for annutiy giving 20 years then PV = 1500/(1+r) +1500/(1+r)^2+1500/(1+r)^3 ...1500/(1+r)^20 = $1500*9.89164 = $14837.46 Amount she should be willing to pay = 14837.46-10110.75 = 4726.71 3)PV of annuity if paid forever= 1500/.079= $18987.342

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