Your investment advisor wants you to purchase an annuity that will pay you $25,000 per year for 10 years. If you require a 7% return, what is the most you should pay for this investment

$175,590

Explanation:

To calculate the most that you should pay for this investment you have to find the present value using the formula:

PV = PMT*[(1-(1+r)^-n)/r]

PV = present value

PMT = payment amount: $25,000

r = interest rate: 7%

n = number of periods: 10

PV= 25,000*[(1-(1+0.07)^-10)/0.07]

PV= 25,000*[0.491651/0.07]

PV= 25,000*7.02358

PV= 175,590

The most that you should pay for this investment is: $175,590.

The most you should pay for the investment is $175589.54      

Explanation:

Given C = $25 000, n = 10 years, r = 7%, PV = ?

As we looking for the amount you should pay now to have 25 000 paid to your account for 10 years

PV = C ×{ 1 - (1+r)^-n/r}

      = 25000×{1-(1+0.07)^-10/0.07}

       =$175589.54

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