Present value. County Ranch Insurance Company wants to offer a guaranteed annuity in units of $400, payable at the end of each year for 10 years. The company has a strong investment record and can consistently earn 9% on its investments after taxes. If the company wants to make 1% on this contract, what price should it set on it? Use 8% as the discount rate. Assume it is an ordinary annuity and the price is the same thing as present value. ..... What price should the company set on the annuity contract? (Round to the nearest cent.)
Present value. County Ranch Insurance Company wants to offer a guaranteed annuity in units of $400, payable at the end of each year for 10 years. The company has a strong investment record and can consistently earn 9% on its investments after taxes. If the company wants to make 1% on this contract, what price should it set on it? Use 8% as the discount rate. Assume it is an ordinary annuity and the price is the same thing as present value. ..... What price should the company set on the annuity contract? (Round to the nearest cent.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
![**Present Value Calculation**
**Scenario:** County Ranch Insurance Company wants to offer a guaranteed annuity in units of $400, payable at the end of each year for 10 years. The company has a strong investment record and can consistently earn 9% on its investments after taxes. If the company wants to make 1% on this contract, what price should it set? Use 8% as the discount rate. Assume it is an ordinary annuity and the price is the same thing as present value.
---
**Task:** Calculate the price the company should set on the annuity contract.
**Formula:** Present Value of an Ordinary Annuity
\[
PV = P \times \left(\frac{1 - (1 + r)^{-n}}{r}\right)
\]
Where:
- \( PV \) is the present value (price to be calculated)
- \( P \) is the annuity payment ($400)
- \( r \) is the discount rate per period (0.08)
- \( n \) is the total number of periods (10 years)
**Question:** What price should the company set on the annuity contract?
**Input Box:** $ _______ (Round to the nearest cent.)](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fd8c403c1-73da-4878-97dd-7583351688c0%2F28211f0f-dfb2-46b6-ae00-50743fe37d56%2Fnylw2u_processed.png&w=3840&q=75)
Transcribed Image Text:**Present Value Calculation**
**Scenario:** County Ranch Insurance Company wants to offer a guaranteed annuity in units of $400, payable at the end of each year for 10 years. The company has a strong investment record and can consistently earn 9% on its investments after taxes. If the company wants to make 1% on this contract, what price should it set? Use 8% as the discount rate. Assume it is an ordinary annuity and the price is the same thing as present value.
---
**Task:** Calculate the price the company should set on the annuity contract.
**Formula:** Present Value of an Ordinary Annuity
\[
PV = P \times \left(\frac{1 - (1 + r)^{-n}}{r}\right)
\]
Where:
- \( PV \) is the present value (price to be calculated)
- \( P \) is the annuity payment ($400)
- \( r \) is the discount rate per period (0.08)
- \( n \) is the total number of periods (10 years)
**Question:** What price should the company set on the annuity contract?
**Input Box:** $ _______ (Round to the nearest cent.)
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