Your subscription to Investing Wisely Weekly is about to expire. You plan to sub

Question

Your subscription to Investing Wisely Weekly is about to expire. You plan to subscribe to the magazine for the rest of your life, and you can renew it by paying $75 annually, beginning immediately, or you can get a lifetime subscription for $750, also payable immediately. Assuming you can earn 5.5% on your funds and the annual renewal rate will remain constant, how many years must you live to make the lifetime subscription the better buy? Round fractional years up. (Hint: Be sure to remember that you are solving for how many years you must live, not for how many payments must be made.)

A. 7

B. 8

C. 9

D. 11

E. 13

Explanation / Answer

Answer: E. 13

Monthly annuity, so interest must be calculated on monthly basis 100. (2.10) N, lifetime vs. annual pmts .

Find N for an annuity due with the indicated terms to determine how long you must live to make the lifetime subscription worthwhile.

Interest rate 5.5% Annual cost $75 Lifetime subscription cost $750 Number of payments made 13.76 Rounded up: 14

Recall that we used BEGIN mode (because it is an annuity due), so it takes 14 payments to make the lifetime subscription better.

Since the 1st payment occurs today, the 14th payment occurs at t = 13, which is 13 years from now. So, you must live for: 14 -1 = 13 years.

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