Try to Find the answer through Linear Interpolation method P

Try to Find the answer through Linear Interpolation method! Please use annuity table

Problem 4- C - Choosing the Best Annuity (15 pts) Choosing the best annuity Jinnyy wishes to choose the best of four immediate-retirement annuities available to her. In each case, in exchange for paying a single premium today, she will receive equal, annual, end-of-year cash benefits for a specified number of years. She considers the annuities to be equally risky and is not concerned about their differing lives. Her decision will be based solely on the rate of return she will earn on each annuity. The key terms of the four annuities are shown in the following table Premium Life Annuity Paid Today Annual Benefit (Years) $30,000 $25,000 $40,000 $35,000 $3,100 20 $3,900 $4,200 $4,000 a. Find the nearest 1% the rate of return range on each of the four annuities Jnnyy is considering? For example, the rate of return is between 2%-3%(12 pts) b. Given Jinnyy stated decision criterion, which annuity would you recommend? ( 3 pts)

Solution

Answer to question #a :

Since Jinny is not concerned about their differing lives , we ignore Life ( years) for each annuity while calculating respective Rate of Return.

Absolute Rate of return will be calculated as = Annual benefit/Premium paid today x 100

Accordingly , corresponding rate of returns as follows :

Annuity

Rate of Return Calculation

Rate of return range

A

3100/30000 X 100 = 10.33 %

10% - 11%

B

3900/25000 X 100 = 15.6%

15% - 16%

C

4200/40000 X 100 = 10.5%

10% - 11 %

D

4000/35000 X 100 = 11.43 %

11% - 12%

Answer to question #b:

Since absolute rate of return is highest for B i.e. 15.6% , would recommend annuity B

Annuity	Rate of Return Calculation	Rate of return range
A	3100/30000 X 100 = 10.33 %	10% - 11%
B	3900/25000 X 100 = 15.6%	15% - 16%
C	4200/40000 X 100 = 10.5%	10% - 11 %
D	4000/35000 X 100 = 11.43 %	11% - 12%