Assume that you own an investment that will pay you $15,000 per year for 12 years, with the first payment today. You need money today to start a new business, and your uncle offers to give you $120,000 for the investment. If you sell it, what rate of return would your uncle earn on the annuity?
A) 7.12%
B) 7.59%
C) 7.99%
D) 8.41%

Question

Quizplus · Accepted Answer

The uncle's rate of return can be calculated using the present value of an annuity formula, considering the annuity includes an immediate payment (thus, it's an annuity due). Given the first payment is today, the present value (PV) is $120,000, the payment (PMT) is $15,000, and the number of periods (n) is 12. The rate of return (r) is what we need to find. Using financial calculators or software that can handle annuity due calculations, inputting these values will give a rate of return close to 8.41%. This is because the investment is worth $120,000 today for payments that total more over time, indicating the uncle expects to earn more than he paid, at the calculated rate.

Assume That You Own an Investment That Will Pay You