Alan Arnold has just turned 65.He has $100,000 to invest in a retirement annuity.One investment company has offered to pay Alan $10,000 per year for 15 years (payments to begin in one year)in exchange for an immediate $100,000 payment.If Alan accepts the offer from the investment company,what is his expected return on the $100,000 investment (assume a return that is compounded annually)? Present value tables or a financial calculator are required.

Question

Quizplus · Accepted Answer

The expected return is the interest rate or discount rate that makes the present value of the annuity payments equal to the initial investment. Given that Alan is to receive $10,000 per year for 15 years for his $100,000 investment, the correct interest rate would fall between 5 and 6 percent. This is because at lower rates, the present value of the annuity payments would be higher than the initial investment, and at higher rates, it would be lower.

Alan Arnold Has Just Turned 65