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ou may pay $15,000 for an annuity that pays $2500 per year for the next 10 year. You want a real rate of return of 5%, and you estimate inflation will average 6% per year what is the annual cost to own this annuity

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ogbe2k3

Answer:

The annual cost to have this annuity is 16.66%

Explanation:

Solution

Given that

You pay an annuity of  = $15,000

Annuity pays =$2500 per year

n =10 years

The rate of return = 5%

The estimated inflation is -6% average

Now

We find the annual cost to own this annuity

Thus

We find the real or actual yield given as:

I =PNR

$2500 = $15,000 * 1 * r

So,

R=$2500/$15,000

=0.1666 or 16.66 %

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