You currently have $67,000 in an interest-earning account.From this account,you wish to make 20 year-end payments of $5,000 each.What annual rate of return must you make on this account to meet your objective?
A)4.16%
B)5.03%
C)6.42%
D)7.32%

Question

Quizplus · Accepted Answer

To calculate the required annual rate of return, we can use the present value of an annuity formula:
PV = PMT * ((1 - (1 + r)^-n) / r)
Where:
PV = present value (amount in the account)
PMT = payment amount ($5,000)
r = annual interest rate
n = number of payments (20)
We can plug in the given numbers and solve for r:
$67,000 = $5,000 * ((1 - (1 + r)^-20) / r)
Solving for r using a financial calculator or spreadsheet, we get r = 4.16%.
Therefore, the best choice is A) 4.16% because it is the calculated annual rate of return required to make the 20 year-end payments of $5,000 each from the existing account balance of $67,000.

You Currently Have $67,000 in an Interest-Earning Account