Cheyenne has the option to buy two different annuities. The first starts in six years and pays $3,500 per year for five years. The second begins in 10 years and pays $1,800 per year for six years. Currently, Cheyenne is very risk-averse and thus her current required return is 3.2%. In nine years, she expects to be more financially secure and her cost of capital will increase to 17.1% from then on. If each annuity costs $5,000 today, which annuity (or annuities), if any, should Cheyenne purchase? How much value will she realize from the purchase(s), if she makes any purchases? O Purchase first; $10,937.90 value realized from first O Purchase first; $8,615.43 value realized O Purchase both; $8,615.43 value realized from first, $1,443.73 from second Purchase both; $10,937.90 value realized from first, $1,443.73 from second
Cheyenne has the option to buy two different annuities. The first starts in six years and pays $3,500 per year for five years. The second begins in 10 years and pays $1,800 per year for six years. Currently, Cheyenne is very risk-averse and thus her current required return is 3.2%. In nine years, she expects to be more financially secure and her cost of capital will increase to 17.1% from then on. If each annuity costs $5,000 today, which annuity (or annuities), if any, should Cheyenne purchase? How much value will she realize from the purchase(s), if she makes any purchases? O Purchase first; $10,937.90 value realized from first O Purchase first; $8,615.43 value realized O Purchase both; $8,615.43 value realized from first, $1,443.73 from second Purchase both; $10,937.90 value realized from first, $1,443.73 from second
Chapter5: The Time Value Of Money
Section: Chapter Questions
Problem 16P
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