Problem:
Jill Chew 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 each of the four annuities are shown in the following table.
Annuity Premium Paid Today Annual Benefit Life (years)
A $30,000 $3,100 20
B 25,000 3,900 10
C 40,000 4,200 15
D 35,000 4,000 12
Q1. Calculate to the nearest 1 percent the rate of return on each of the four annuities Jill is considering.
Q2. Given Jill's stated decision criterion, which annuity would you recommend?