You are considering investing $750 in a 10 year annuity. The rate of return you require is 6.5%. What annual cash flow from the annuity will provide the required return?

Question

Quizplus · Accepted Answer

The annual cash flow from the annuity can be calculated using the formula for the present value of an annuity: $PV = PMT \times \left[\frac{1 - (1 + r)^{-n}}{r}\right]$, where PV is the present value ($750), PMT is the annual payment, r is the annual interest rate (6.5% or 0.065), and n is the number of periods (10 years). Rearranging the formula to solve for PMT gives: $PMT = PV \times \frac{r}{1 - (1 + r)^{-n}}$. Substituting the given values and solving for PMT gives approximately $104.33.

You Are Considering Investing $750 in a 10 Year Annuity