Question
Please lead me in the right direction, I keep getting this wrong, please help Your financial planner offers you two different investment plans. Plan X
Please lead me in the right direction, I keep getting this wrong, please help
Your financial planner offers you two different investment plans. Plan X is a $22,000 annual perpetuity. Plan Y is a 10-year, $28,000 annual annuity. Both plans will make their first payment one year from today. At what discount rate would you be indifferent between these two plans?
Discount Rate ___________ %
My formula which is incorrect :
Future value of perpetuity = Annual cash flow / r = 22000/r
Future value of annuity = Annuity * [(1+r)^n - 1]/r = 28000 * [(1+r)^10 - 1]/r
22000 / r = 28000 * [(1+r)^10 - 1]/r
Solving this for r, Iget r = 5.9696% or 5.97%... Connect says this is incorrect
Please help
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started