# SHORT ANSWER. Write a short answer to explain the following

**State the Rate of Return rule for making investments**

This is identified as an essential rule of making investment. It note that an investor ought to make an investment where the rate of return is larger than the prospective cost of capital. Essentially, CFI (2022) note that the required rate is the minimum acceptable compensation for the investment’s level of risk. This is hence a core aspect in the corporate finance and equity valuation. For example, equity valuation is appropriately adopted in discount rate for establishing the present value of cash flows.

# TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.

**An equal-payment home mortgage is an example of an annuity.**

17)

**T.**

The rationale of this is that an annuity is a contract between an individual and the insurance organisation in which you make a lump-sum payment or series of payments and in return, receive regular disbursements starting with either promptly or at some point in the future. Further, the annuity mortgage (repayment mortgage) is identified as a mortgage where a pay of a fixed monthly amount is made up of interest and capital repayment. The equal payment of the home mortgage is identified as annuity (Karpestam & Johansson, 2019)).

__18. PROBLEM SET USING ANNUITY TABLE__

After you retired you plan to spend $200,000 a year for 25 years. The annually compounded interest rate is 10%. How much must you save by the time you retire to support this spending plan.

Present the solution in the following steps.

In the first step I want to see which formula would you use.

Write down that general formula without inserting any values.

In the second step insert the values and solve the formula.

You would need the annuity table to solve this question.

In the third step show me which row and column of the annuity table would you use. (e.g you can say row x say row x and column y).

What is the value of the annuity factor for this question from the annuity table

*STEP 1 FORMULA*

F = P * ([1 + I]^N – 1 )/I

For the identified formula, the letters represent the following variables;

**P**= Payment amount

**I**= Interest (discount) rate

**N=** Number of payments

**“^”** = N is an exponent

**F**= Future value of the annuity

*STEP 2*

*INSERT VALUES INTO FORMULA*

F = $200,000 *([1 + 10/100]^25 – 1 )/0.1

*STEP 3*

*WHAT IS THE ROW AND COLUMN FROM THE ANNUITY TABLE?*

This is in the row 10 and column 6

*Step 4*

*WHAT IS THE ANNUITY FACTOR VALUE?*

F = $200,000 *([1 + 10/100]^25 – 1 )/0.1

F= $200,000 *1.1^25)/0.1

F= $200,000 *10.83)/0.1

F= $2.2Million

*STEP 5*

*WHATS THE NUMERAICAL ANSWER FOR THIS QUESTION. BRIEFLY EXPLAIN YOUR ANSWER*

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