C. D. Rom has just given an insurance company $49,500. In return, he will receiv

Question

C. D. Rom has just given an insurance company $49,500. In return, he will receive an annuity of $7,200 for 20 years.

At what rate of return must the insurance company invest this $49,500 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.)

At what rate of return must the insurance company invest this $49,500 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.)

Explanation / Answer

Present value of insurance = 49500

=>

7200 * PVIFA(r%,20) = 49500

=>
PVIFA(r%,20) = 49500/7200 = 6.875 , it is between 13% and 14%

so rate of return r = 13.5%

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