Question
5. (1) A perpetuity has increasing payments. The payments are $100 at the end of the first year, $1,100 at the end of the second
5. (1) A perpetuity has increasing payments. The payments are $100 at the end of the first year, $1,100 at the end of the second year, $2,100 at the end of the third year, etc. Payments continue forever with each payment being $1,000 greater than the previous payment. (2) A 20 year annuity-due has annual increasing payments. The first payment is $Q. The second payment is $Q(1.08). The third payment is $Q(1.08)2 . The payments continue for 20 years with each payment being 108% of the prior payment. Both the perpetuity in (1) and annuity in (2) have a present value of $249,575.30 at an annual effective interest rate of i. (a) Find the value of i. (b) Find the value of Q.
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