Question

# your financial planner offers you two different investment plans. plan x is a 25000 annual perpetuity....

your financial planner offers you two different investment plans. plan x is a 25000 annual perpetuity. plan y is a 10 year 51000 annual annunity. both plans will make their first payment one year from today. at what discount rate would you be indifferent between these two plans?

X:

Present value of perpetuity=Annual cash flows/discount rate

=\$25000/discount rate

Y:

Present value of annuity=Annuity[1-(1+discount rate)^-time period]/rate

=\$51000[1-(1+discount rate)^-10]/discount rate

\$25000/discount rate =\$51000[1-(1+discount rate)^-10]/discount rate

\$25000=\$51000[1-(1+discount rate)^-10]

(\$25000/\$51000)=[1-(1+discount rate)^-10]

(1+discount rate)^-10]=1-(\$25000/\$51000)

1/(1+discount rate)^10=0.509803921

(1+discount rate)^10=1/0.509803921

(1+discount rate)=(1.961538464)^(1/10)

1+discount rate=1.06969

discount rate=1.06969-1

=6.97%(Approx).

#### Earn Coins

Coins can be redeemed for fabulous gifts.

##### Need Online Homework Help?

Most questions answered within 1 hours.

##### Active Questions
• A gigantic warehouse stores approximately 40 million empty aluminum beer and soda cans.​ Recently, a fire...
• 5. There are many complaints from passengers about the late running of buses on a particular...
• (1 point) A survey of 1780 people who took trips revealed that 117 of them included...
• Implement the following circuit to test the characteristics of a D flip flop. Note: Using a...
• Next, suppose you add the unemployment rate, as a variable, to the regression model above and...
• In a recent random sample, where 600 adults were surveyed, 16.4% indicate that they have fallen...