Question
Question 1: Time Value of Money Problems. For each question below, make sure that you draw a timeline, show the appropriate equations, and draw a
Question 1: Time Value of Money Problems. For each question below, make sure that you draw a timeline, show the appropriate equations, and draw a box around your final answer. Answers without a timeline and an equation will receive zero credit.
1a. You are offered a 20-year growing annuity (e.g. there will be 20 payments) that will pay you $350 in six years and grow at a rate of 4% per year thereafter. The appropriate discount rate for the investment is 9%. What is the present value of this investment?
1b. A financial advisor offers you two investment opportunities. Both offer a rate of return of 11%. Investment A promises to pay you $450 in 1 year, $650 in 2 years, and $850 in 3 years. Investment B promises to pay you $850 in 1 year, $x in 2 years, and $450 in 3 years. What must x be to make you indifferent between Investment A and B?
1c. Your friend offers to triple your money in just three years. What is the annual rate of return he is offering you?
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