Question

Consider the case of the following annuities, and the need to compute either their expected rate of return or duration.

Answer 1

Answer:

1. 5.00%

2. 15.70 year

Explanation:

As per the data given in the question,

1)  For computing the interest rate we need to applied the RATE formula which is shown in the attached spreadsheet

Given that

Future value = 0

Present value = -$2587.09

PMT = $950

NPER = 3  years

The formula is shown below:

= RATE(NPER;PMT;-PV;FV)

The present value comes in negative

After applying the above formula, the interest rate is 5%

2)  For computing the number of years we need to use NPER i.e to be shown in the attachment below

Given that

Future Value = $920,925

Present Value  = 0

PMT = -$40,000

Interest rate = 5%

The formula is shown below

= NPER(RATE;-PMT;PV;FV)

The PMT comes in negative

After applying the above formula, the nper is 15.70 years