Question

Nicki​ Johnson, a sophomore mechanical engineering​ student, receives a call from an insurance​ agent, who believes that Nicki is an older woman ready to retire from teaching. He talks to her about several annuities that she could buy that would guarantee her an annual fixed income. The annuities are as follows in the popup​ window:

ANNUITY	INITIAL PAYMENT INTO ANNUITY (AT t = 0)	AMOUNT OF MONEY RECEIVED PER YEAR	DURATION OF ANNUITY (YEARS)
A	60000	7500	25
B	50000	8000	10
C	70000	9000	20

If Nicki could earn 12 percent on her money by placing it in a savings​ account, should she place it instead in any of the​ annuities? Which​ ones, if​ any? Why?

What rate of return could Nicki earn on her money if she place it in annuity A with ​$7,500 payment per year and 25 years​ duration?

Answer 1

Rate of return from all the annuities is lower than the rate of return of Savings account at 12%. Hence, Nicki should not place her money in any of the annuity and instead place it in Savings account having higher interest of 12%.

If Nicki place her money in annuity A with ​$7,500 payment per year and 25 years​ duration, she will get a rate of return of 11.72%.