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A local bank’s advertising reads: "Give us $50,000 today, and we’ll pay you $800 every year forever." If you plan to live forever, what annual interest rate will you earn on your deposit?1.92%1.60%2.56%2.24%

Sagot :

Cricetus

Answer:

The correct response is Option b (1.60%).

Explanation:

According to the question,

Initial investment,

= $50,000

Perpetual annual cash flows,

= $800

Now,

The interest rate will be:

= [tex]\frac{Perpetual \ annul \ cash \ flows}{Initial \ investment}[/tex]

On substituting the given values, we get

= [tex]\frac{800}{50,000}[/tex]

= [tex]0.016[/tex]

i.e.,

= [tex]1.60 \ percent[/tex]

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