Question

Assume that you own an annuity that will pay you $17,000 per year for 11 years, with the first payment being made today, You need money today to open a new restaurant, and your uncle offers to give you $105,000 for the annuity. If you sell it, what rate of return would your uncle earn on his investment?

a) 20.35%
b) 14.20%
c) 9.72%
d) none of the answers is correct
e) 18.85%

Answer 1

The rate of return that your uncle would earn on his investment is 78.1%, which is not one of the given options.

Step-by-step explanation:

To calculate the rate of return on an investment, we can use the formula:
Rate of return = ((Future value - Present value) / Present value) * 100

In this case, the present value is $105,000 (the amount your uncle will pay for the annuity), and the future value is the sum of all the payments over the 11-year period, which is $17,000 * 11 = $187,000.

Plugging these values into the formula, we get:
Rate of return = ((187,000 - 105,000) / 105,000) * 100 = 78.1%

Therefore, the rate of return that your uncle would earn on his investment is 78.1%, which is not one of the given options.