Answer:
The rate of return that will be earned is 8.41%
Explanation:
The certain amount that is paid to but an annuity is usually equivalent to the present value of all the payments that is being made in the future at a discounted rate of return.
However; given that the annual installments begins from today; then the present values of the remaining 11 installments wiil be determined.
In addition to that; the payment of $120,000 covers the 12 installments. the present value of one installment is said to be $15,000
Thus; the present value of the remaining 11 installments is:
$120,000 - $15,000 = $105,000
We compute the rate of return using the RATE formula in EXCEL as shown below.
A B
1 Present value 120000
2 Time period 12 years
3 Number of payments
in future 11
4 Payment Amount 15000
5 Rate of Return = RATE (B3,B4. -(B1 - 15000))
The outcome of the result is as follows:
A B
1 Present value $120000
2 Time period $12 years
3 Number of payments
in future 11
4 Payment Amount $15000
5 Rate of Return 8.41%
∴ The rate of return that will be earned is 8.41%
