Annuities Practice Problems

Prepared by Pamela Peterson Drake

  1. Congrat! You just won the $64 million Florida lottery. Now the Surely Company is offering you $30 million in exchange for your 20 installments on your winnings. If your opportunity cost of funds is 8%, should you agree to this deal?
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  3. Carol Calc plans on retiring on her 60th birthday. She wants to put the same amount of funds aside each year for the next twenty years -- starting next year -- so that she will be able to withdraw $50,000 per year for twenty years once she retires, with the first withdrawal on her 61st birthday. Caol is 20 years old today. How much must she set aside each year for her retirement if she can earn 10% on her funds?
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  5. Have I got a deal for you! If you lend me $100,000 today, I promise to pay you back in twenty-five annual installments of $5,000, starting five years from today (that is, my first payment to you is five years from today). You can earn 6% on your investments. Will you lend me the money?
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  7. You have choice when subscribing to our magazine: you can
    1. pay $100 now for a four year subscription,
    2. pay $28 at the beginning of each year for four years, or
    3. pay $54 today and $54 again two years from today.

    Which is the best deal for you, the subscriber, if your opportunity cost of funds is 10%?

     

  8. The Trust Worthy loan company is willing to lend you $10,000 today if you promise to repay the loan in six monthly payments of $2,000 each, beginning today. What is the effective annual interest rate on Trust Worthy's loan terms?

 

Solutions