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Unformatted text preview: in parts a and b, which bank should Ms.
Martin deal with? Why?
d. If a fourth bank (bank D), also with a 4% stated interest rate, compounds
interest continuously, how much would Ms. Martin have at the end of the
third year? Does this alternative change your recommendation in part c?
Explain why or why not.
LG3 LG2 LG3 ST 4–2 Future values of annuities Ramesh Abdul wishes to choose the better of two
equally costly cash flow streams: annuity X and annuity Y. X provides a cash
inflow of $9,000 at the end of each of the next 6 years. Y provides a cash inflow
of $10,000 at the end of each of the next 6 years. Assume that Ramesh can earn
15% on annuity X and 11% on annuity Y.
a. On a purely subjective basis, which annuity do you think is more attractive?
b. Find the future value at the end of year 6, FVA6, for both annuity X and
c. Use your finding in part b to indicate which annuity is more attractive. Compare your finding to your subjective response in part a. LG4 ST 4–3 Present values of single amounts and streams Y...
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