If the horse is found, a prize of $22,300 a year for 20 years is provided. The actual cost to the publisher to purchase an annuity to pay for the prize is $219,000. What interest rate (to the nearest percent) was used to determine the amount of the annuity

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Business

Luka Wright

17 July, 09:08

If the horse is found, a prize of $22,300 a year for 20 years is provided. The actual cost to the publisher to purchase an annuity to pay for the prize is $219,000. What interest rate (to the nearest percent) was used to determine the amount of the annuity

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Alijah Swanson · Answer 1

8%

Explanation:

This type of annuity is an Ordinary annuity; cashflows occur at the end of each year. Even though not mentioned, we assume it's the default scenario. Annuity Due on the other hand has cashflows that occur at the beginning of each year.

Since this is an annuity problem, you can use a financial calculator to find the interest rate (I) of the annuity.

Use the following inputs;

Duration; N = 20

Present value; PV = - 219000

Recurring annual payments; PMT = 22300

One time future value cashflow; FV = 0 (use 0 if not given)

then compute the interest rate; CPT I/Y = 7.997% or 8%