You received an annuity as a legacy gift from your beloved grandmother. It pays you annually $14000 per year (end of the year) for the next 15 years, You however, have other ideas than receiving just $14000 per year, and would like to get a larger amount of cash upfront against the annuity. One of the local financial firms has offered you $67000 for the annuity.
a. You are evaluating the offer, and would like to calculate the implied interest rate that the firm is charging for the above deal.
b. Also, after calculating this, please come up with a reasonable benchmark interest rate that you would be comfortable with given your risk profile, with which you can compare the implied interest rate you just calculated above against. This process will help you make the right decision about the offer of $67000. What is your conclusion?
c. At that "reasonable benchmark rate of interest, please calculate the value of the firm's offer as it "should be" for you. You can use this number as a counter offer to the firm.