Question

You have deposited $16,167 in a special account that has a guaranteed rate of return. If you withdraw $3,000 at the end of each year for 7 years, you will completely exhaust the balance in the account. The guaranteed rate of return is closest to: (Ignore income taxes.) Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using the tables provided.

Answer 1

7%

Step-by-step explanation:

in order to solve this we can use the present value of an annuity formula:

present value of an annuity = annuity payment x annuity factor

• present value of an annuity = $16,167
• annuity payment = $3,000
• annuity factor = ? all we know is that it lasts 7 periods

annuity factor = $16,167 / $3,000 = 5.389

using a present value of an annuity table, we can look for the annuity factor that corresponds to 7 periods and is equal to 5.389. In this case, the interest rate is 7% (annuity factor, 7%, 7 periods = 5.389)