Aunt Zelda’s son starts college in 5 years for which she will need $15,000 payable at the end of each of the 4 years. Suppose she can buy an annuity in 5 yrs. that will enable her to make the four $15,000 annual payments. Draw a timeline for all cash flows. What will be the cost of the annuity 5 years from today? What is the most she should be willing to pay for it if purchased today? Assume an interest (discount) rate of 6% during these 9 years.

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A:

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