Tina has $12000 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 $(130 + 15) at the end of month

( = 1,2, . ,60). In order to buy the annuity at time 0, Tina decides to borrow additional $4000 from a bank and

buy the annuity. She repays the loan by level monthly payments of $500 plus a drop payment

made 1 month after 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. Helena withdrawals all amount and closes the account at the end of 5th year.

Calculate the IRR of Tinas investment strategy. Please provide full justification to your answer.

Can we use IRR obtained to examine the profitability of the project? Explain your answer.

Bonus Problem 3 (Optional, 25 marks) Tina has $12000 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 $(130 + 15k) at the end of the month (k = 1,2, ....,60). In order to buy the annuity at time 0, Tina decides to borrow additional $4000 from a bank and buy the annuity. She repays the loan by n level monthly payments of $500 plus a drop 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. Helena withdrawals all amount and closes the account at the end of 5th year. Calculate the IRR of Tina's investment strategy. Please provide full justification to your answer. Can we use IRR obtained to examine the profitability of the project? Explain your