Problem 3

a. What is the present value of a series of 10 annual payments of $1000, assuming a prevailing 5% interest rate?

$___________________

b. What is the present value of a series of 10 semi-annual payments over a period 5 years of $1000, assuming a prevailing 10% interest rate. Semi-annual indicates 2 payments per year, one every six months

$___________________

c. Calculate the present value of the two investments.

• Investment A yields an annual dividend of $800.

• Investment B yields a $600 annual dividend and also returns a lump sum of $3000 at the end of year 5.

Both investments close out at the end of year 5. Assume a 5% interest rate

Investment A: $___________________

Investment B: $___________________

If both investments were offered to you at the same first cost, which is a better deal?

A ____ B______