Question

2. You are facing two investment opportunities. The first one will return you with an uneven stream of cash flows. The second one is annuity payments. Assume a 4.9% discount rate (your opportunity cost for money) and payments are in the end-of-period.

(2a) How much you are willing to pay for this uneven stream of cash flows? Round to the nearest whole dollar. Year Cash Flow 1 $3,300 2 $3,300 3 $4,500 4 $5,300

(2b) If the investment will provide you with $4200 end-of-period payments for the next four years. How much you are willing to pay for the annuity? (10 points)

(2c) If there is another annuity payments that will break-even with the uneven stream of cash flows (in part 2a), how much you should receive each year from the annuity investment? (10 points) Hint: if two investments break-even, they should have the same present value.

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Answer 1