Answered: Your client is evaluating between the…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter5: The Time Value Of Money

Section: Chapter Questions

Problem 39P

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A) Your client is evaluating between the following two retirement options: Option 1: Pays a lump sum of $3.5 million in 6 years.

Option 2: A 25-year annuity at $180,000 per year starting today. If your client’s required rate of return is 6 percent per year, discuss the option she must choose based on a higher present value?

B) Neal plans to buy a car worth $42,000 today. He is required to pay 15 percent as a down payment and the remainder is to be paid as a monthly payment over the next 12 months with the first payment due at t = 1. Given that the interest rate is 8% per annum compounded monthly, compute the approximate monthly payment. Discuss the impact of increase in interest rate on the monthly payment.

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