Your financial planner offers you two different investment plans. Plan X is a $15,000 annual...
Question:
Your financial planner offers you two different investment plans. Plan X is a $15,000 annual perpetuity. Plan Y is a 14-year, $25,000 annual annuity. Both plans will make their first payment one year from today.
At what discount rate would you be indifferent between these two plans?
Annuity and Perpetuity:
An annuity is a stream of payments of equal amount that are delivered at a fixed frequency. A perpetuity is a special kind of annuity that does not have a specific end date. Therefore, a perpetuity could in principal pay forever.
Answer and Explanation: 1
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View this answerThe discount rate is 6.76% for you to be indifferent.
Given a discount rate {eq}r {/eq}, the present value of a perpetuity with payment {eq}M{/eq}...
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