Solve it using formulas, no tables A company intends to set aside funds to cover for the following future expenses payableduring the next 15 years:•£500 payable monthly in arrears for the first 10 years;•£5,000 per year payable quarterly in arrears for the remaining 5 years.The first investment option the company is considering would pay an effective annualinterest rate of 4.5% throughout the entire 15-year period. Alternatively, another investmentplan that is available pays compound interest at the rates of:••3.6% per annum nominal convertible monthly for the first 5 years, and6% per annum nominal convertible quarterly for the remaining 10 years.Calculate the following:(i) The amount of funds that the company would need to invest at t = 0 under these twooptions.(ii) The investment option the company should choose, and the corresponding amountof saving at t 0 it would make compared to using the other method.=

The company has two choices:Option 1: Steady Interest Rate (4.5% over 15 years)Imagine putting away…

Answered: A company intends to set aside funds to…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter5: The Time Value Of Money

Section: Chapter Questions

Problem 16P

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Question

Solve it using formulas, no tables

A company intends to set aside funds to cover for the following future expenses payable
during the next 15 years:
•
£500 payable monthly in arrears for the first 10 years;
•
£5,000 per year payable quarterly in arrears for the remaining 5 years.
The first investment option the company is considering would pay an effective annual
interest rate of 4.5% throughout the entire 15-year period. Alternatively, another investment
plan that is available pays compound interest at the rates of:
•
•
3.6% per annum nominal convertible monthly for the first 5 years, and
6% per annum nominal convertible quarterly for the remaining 10 years.
Calculate the following:
(i) The amount of funds that the company would need to invest at t = 0 under these two
options.
(ii) The investment option the company should choose, and the corresponding amount
of saving at t 0 it would make compared to using the other method.
=

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