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 $92,000 for the annuity.If you sell it,what rate of return would your uncle earn on his investment?
A) 18.11%
B) 15.33%
C) 14.24%
D) 15.48%
E) 11.61%

Question

Quizplus · Accepted Answer

To calculate the rate of return that the uncle would earn from buying the annuity, we need to use the present value formula:
PV = C * (1 - (1 + r)^-n) / r
where PV is the present value of the annuity, C is the annual payment, r is the rate of return, and n is the number of years. We know that PV = $92,000, C = $15,000, and n = 12.

Using a financial calculator, we can solve for r:
92,000 = 15,000 * (1 - (1 + r)^-12) / r
r = 15.48%

Therefore, the uncle would earn a rate of return of 15.48% on his investment if he bought the annuity from you for $92,000. The correct answer is D.

Assume That You Own an Annuity That Will Pay You