Question

If it were evaluated with an interest rate of 0%, a 10-year regular annuity would have a present value of $3,755.50. If the future (compounded) value of this annuity, evaluated at Year 10, is $5,440.22, what effective annual interest rate must the analyst be using to find the future value?

Answer 1

Answer:

8%

Explanation:

since the interest rate was 0%, Annuity yearly cash flow = $3,755.50 / 10 = $ 375.55

Future value Fv =C ( ( 1 + i)^n - 1 ) / i

$5,440.22 = $ 375.55 ( (1 + i) ¹⁰ - 1) / i

annuity discounting factor = $5,440.22 / $ 375.55

14.486, the annuity discounting factor, using annuity tables and check 10 years row; the discounting factor yields 8%