Choosing the best annuity Nikita Agarwal wishes to choose the best of four annuities available to her. In each case, in exchange for paying a lump sum today, she will receive equal, end-of-year cash payments for a specified number of years. She considers the annuities 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 following table shows the key terms of the four annuities.

a. Calculate, to the nearest 1%, the rate of return on each of the four annuities Nikita is considering.

b. Given Nikita’s stated decision criterion, which annuity would you recommend?

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Annuity ABCD Cost of annuity today () 90,000 75,000 120,000 105,000 Annual cash flow () Life (years) 9,300 11,700 12,600 12,000 15 10 20 12