Net Present Value and Internal Rate of Return
Response to the following problem:
A retired person has $700,000 in a retirement account. An insurance company is offering to give the retired person an annuity of $61,029 at the end of each year for the next 20 years in exchange for the $700,000. The retired person requires a rate of return of 8% on investments; this is the rate currently being earned in the retirement account.
1. What is the net present value of this exchange?
2. What is the internal rate of return implied in this exchange?
3. Should the retired person accept the exchange offered by the insurance company?