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Tina has $10000 at time 0 and is interested in buying an 5-year annuity-immediate which is currently sold at $16000. It is given that the
Tina has $10000 at time 0 and is interested in buying an 5-year annuity-immediate which is currently sold at $16000. It is given that the annuity pays $500 at the end of kth month (k- 1,2,. ,60). In order to buy the annuity at time 0, Tina decides to borrow additional $6000 from a bank and buy the annuity. She repays the loan by n level monthly payments of $500 plus a balloorn payment made 1 month after nth repayment. The first repayment is made one month after the loan is made. The loan charges interest at annual nominal interest rate 10.8% convertible monthly. On the other hand, Tina reinvests the amount received from the annuity immediately into an investment fund. The fund earns interest at annual nominal interest rate 6% convertible monthly. Tina withdrawals all amount and closes the account at the end of 5th year. Suppose that the cost of capital required by Tina is 15%. Examine the profitability using (i) NPV approach and ( IRR approach. Justify the use of IRR approach in this
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