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

To solve the problem, we can use the formula for the present value of an annuity:

PV = C * [(1 - (1 + r)^(-n)) / r]

where PV is the present value of the annuity, C is the annual cash flow, r is the required rate of return (as a decimal), and n is the number of periods (years). Rearranging the formula to solve for C, we get:

C = PV * r / (1 - (1 + r)^(-n))

Plugging in the given values, we get:

PV = $750
r = 6.5% = 0.065
n = 10

C = $750 * 0.065 / (1 - (1 + 0.065)^(-10)) = $104.33

Therefore, the annual cash flow from the annuity that will provide the required return is $104.33, which corresponds to choice (C).

You Are Considering Investing $750 in a 10 Year Annuity