Question

support answer.  All cash flows are end-of-period unless otherwise stated .

3. You are considering purchasing a fifteen-year annuity that offers annual payments of $9,000 with the first payment occurring one year from today. You expect that interest rates will be 5% per annum for the first five-year period, 6.5% per year for the second five-year period, and 8% for the third five-year period. What is the most that you would pay for this investment today, i.e., its present value?

4. You just sold a piece of property. The buyer offers you a choice between accepting $100,000 immediately followed by payments of $50,000 at the end of each year for fifteen years (#1). Alternatively, you could receive $150,000 now and payments of only $43,500 annually for fifteen years ( #2).

a. Which alternative would you prefer a. if your required rate of return is eight percent?

b. If your required rate of return is thirteen percent?

c. At what required rate of return would these two investments have the same present value?

Answer 1