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Sagot :
A 1.03% rate of return is built into the annuity.
- First option
- To receive a single payment today of $4,500,000
- Second option
- To receive an annual payment of $250,000.
- Term is equal to 20 years.
- Let the rate of return be x%.
- A series of payments paid at regular intervals is known as an annuity. Regular savings account deposits, mortgage payments, insurance premiums, and pension payments are all examples of annuities. The periodicity of payment dates allows for the classification of annuities.
- At this rate, the present value of the annuity is $4,500,000.
- The present value of the first option equals the present value of the second option.
- $4,500,000 = $250,000[1/x + 1/x² + … + 1/x^20]
- Upon solving, we get approximately x is 1.03%.
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