Zweli wants to buy an ordinary annuity that pays R6 000 a year for the next 20 years. The expect annual interest rates will be 6% over that time period. what is the maximum of he will pay for annuity?

Solution

Zw e l i w an t s t o b u y an or d ina ry ann u i t y t ha t p a ys R 6000 a ye a r f or t h e n e x t 20 ye a rs . T h e e x p ec t ann u a l in t eres t r a t es w i ll b e 6% o v er t ha t t im e p er i o d . w ha t i s t h e ma x im u m h e w i ll p a y f or ann u i t y ?

Principal : 2727.27

Solution steps

Translate the problem into an equation:

6000 = P (1 + 0.06 \cdot 20)

Solve for

P, 6000 = P (1 + 0.06 \cdot 20) : P = 2727.27

Principal : 2727.27