Question

7. Suppose you have a choice between receiving $2,550,000 today or a 20-year annuity of $250,000, with the first payment coming one year from today. What rate of return is built into the annuity?

Answer 1

Solution :-

fx =IRR(B4:B24) B с B26 A 1 Solution :- 2 3 Year 4 0 5 6 2 7 3 8 4 9 10 6 11 7 12 8 13 9 14 10 15 11 16 12 17 13 18 14 19 15 20 16 21 17 22 18 23 19 24 20 25 26 IRR 27 28 Formula 29 30 31 Cashflow ($2,550,000.00) $250,000.00 $250,000.00 $250,000.00 $250,000.00 $250,000.00 $250,000.00 $250,000.00 $250,000.00 $250,000.00 $250,000.00 $250,000.00 $250,000.00 $250,000.00 $250,000.00 $250,000.00 $250,000.00 $250,000.00 $250,000.00 $250,000.00 $250,000.00 7.49% IRR(B4:B24)

Now the Rate of Return that  is built into the annuity ( Makes Annuity Present Value $2,550,000 ) = 7.49%

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