ou may pay $15,000 for an annuity that pays $2500 per year for the next 10 year. You want a real rate of return of 5%, and you estimate inflation will average 6% per year what is the annual cost to own this annuity

The annual cost to have this annuity is 16.66%

Explanation:

Solution

Given that

You pay an annuity of = $15,000

Annuity pays = $2500 per year

n = 10 years

The rate of return = 5%

The estimated inflation is - 6% average

Now

We find the annual cost to own this annuity

Thus

We find the real or actual yield given as:

I = PNR

$2500 = $15,000 * 1 * r

So,

R=$2500/$15,000

=0.1666 or 16.66 %