Your sister needs money and comes to you with a deal. She asks you to pay $2,000 at the end the first year, then increasing by $500 every year til the 20th year. Then, for the next 20 years, she will pay you back twice the amount you paid for each of your annual payments, starting the next year right after you finish your last payment. Thus, you receive $4,000 at the end of year 21 and $5,000 at the end of next year and so on.

Your sister claims it is beneficial for you to accept this deal since you are getting back twice the amount you let her borrow.

1. Draw the Cash Flow Diagram

2. What is the interest rate that makes you just indifferent between accepting or rejecting her deal?

3. Assume your 1) your TVOM is 5%, 2) you decided to lend the amount asked by your sister.

How many times of your original payment should you ask her for (Currently shes giving you back double the amount you paid) if you want to earn $25,000 profit now? First calculate the present worth of the given cash flow at time 0.