Question

Rick wants to determine how much you must pay to buy an annuity with a company insurance. The annuity consists of cash flows of $ 1,500 to be received at the end of every year for 6 years. The required return is 12% per year, compounded quarterly.

Answer 1

Step 1:	Effective rate
	Effective rate of interest = (1+r/n)^n -1
	n= number of periods
	r = interest rate
	= (1+0.12/4) ^4 - 1
	=12.550881%
Step 2:	Present Value Of An Annuity
	= C*[1-(1+i)^-n]/i]
	Where,
	C= Cash Flow per period
	i = interest rate per period
	n=number of period
	= $1500[ 1-(1+0.12550881)^-6 /0.12550881]
	= $1500[ 1-(1.12550881)^-6 /0.12550881]
	= $1500[ (0.5081) ] /0.12550881
	= $6,072.08
	Correct Answer = $6072.08