Question

Assume that you own an annuity that will pay you $15,000 per year for 12 years, with the first payment being made today. You need money today to start a new business, and your uncle offers to give you $156,000 for the annuity. If you sell it, what rate of return would your uncle earn on his investment

Answer 1

Answer: 2.72%

Explanation:

An annuity is a series of payments that is made at equal intervals. Examples are monthly home mortgage payments, regular deposits to a savings account, pension payments.

Number of payment period (NPER) = 12 years

Payment per period (PMT) = $15000

Amount needed, PV = $156000

The formula for an annuity is calculated as:

P = PMT x ((1 – (1 / (1 + r) ^ -n)) / r)

= Rate(12,15000,-156000,1)

Rate = 2.72%