C. D. Rom has just given an insurance company $39,500. In return, he will receiv

Question

C. D. Rom has just given an insurance company $39,500. In return, he will receive an annuity of $5,200 for 20 years.

At what rate of return must the insurance company invest this $39,500 in order to make the annual payments? Use Appendix D for an approximate answer, but calculate your final answer using the financial calculator method. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

C. D. Rom has just given an insurance company $39,500. In return, he will receive an annuity of $5,200 for 20 years.

Explanation / Answer

Present Value of Annuity = Periodic Payment x ((1-((1+r)^(-n)))/r)

Here Present Value of Annuity = $39500

Periodic Payment = $5200

n = 20 Years

THus we have

Present Value of Annuity = Periodic Payment x ((1-((1+r)^(-n)))/r)

$39500 = $5200 x ((1-((1+r)^(-20)))/r)

r = 11.73%

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