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Annuity evaluation

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Your cost of capital is 11 percent, and here is the offer:

You put in $900 per year for the first 11 years (years 1 through 11) and our company will pay you $2500 for the following 22 years (years 12 through 33). All payments will be made at the end of the year.

You will live at least 35 more years. Ignoring taxes, should you buy the annuity? Base your response entirely on financial grounds.

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Solution Preview

In order to make the decision we need to compare the values at the same point in time. We can choose the time as at the end of 11 years. At that time we would have the Future Value of our savings and the comparison would ne done with the present value of the annuity since that would be the value of the annuity at the start of ...

Solution Summary

The solution explains how to make a decision whether to buy an annuity or not.