Question
We pay you $18,000 a year for 25 years and thereafter you will pay us $18,000 a year forever! - reads the Highlander (who lives
"We pay you $18,000 a year for 25 years and thereafter you will pay us $18,000 a year
forever!" - reads the Highlander (who lives forever) in an ad. What must be the rate of
interest (EAR) in order for this to be a fair deal, (i.e. the rate of interest that makes the
present value of these two series of cash flows equal). Assume that all payments occur at
the end of the year, so the Highlander receives the first payment at the end of year one
and he makes his first payment at the end of year 26.
A) No such interest rate exists
B) 0%
C) 2.81%
D) 3.18%
E) 3.36%
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