Question

Annuity interest​ rate)  Your folks just called and would like some advice from you. An insurance agent just called them and offered them the opportunity to purchase an annuity for ​$15, 980.78 that will pay them ​$2,500 per year for 10 years. They​ don't have the slightest idea what return they would be making on their investment of ​$15 comma 980.78. What rate of return would they be​ earning? The annual rate of return your folks would be earning on their investment is nothing​%. ​ (Round to two decimal​ places.)

Answer 1

Solution

Given Present value of annuity=Price of annuity= 15980.78

Annuity payment they will get each year for 10 years =2500

Time=10 years

Now

Present value of annuity=Annuity amount*(((1-(1/(1+r)^n))/r)

Here

Present value of annuity=Price of annuity= 15980.78

r= rate of return=discount rate

n= number of periods=10

15980.78=2500*((1-(1/(1+r)^10))/r)

Solving we get r=.0909

Thus the annual return=9.09%

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