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John Smith is nearing retirement. He wants to purchase an annuity that will pay him $125,000...

John Smith is nearing retirement. He wants to purchase an annuity that will pay him $125,000 each year (with the first payment starting 1 year from now) for the next 30 years. The discount rate is 8%. How much money does he need to purchase this annuity today (assuming no commissions or extra fees by the company selling it to him)? Round to the nearest dollar

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Answer #1

Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=$125,000[1-(1.08)^-30]/0.08

=$125,000*11.25778334

which is equal to

=$1,407,223(Approx).

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