Cheyenne has the option to buy two different annuities. The first starts in six years and pays $3,500 per year for five years. The second begins in 10 years and pays $1,800 per year for six years. Currently, Cheyenne is very risk-averse and thus her current required return is 3.2%. In nine years, she expects to be more financially secure and her cost of capital will increase to 17.1% from then on. If each annuity costs $5,000 today, which annuity (or annuities), if any, should Cheyenne purchase? How much value will she realize from the purchase(s), if she makes any purchases? O Purchase first; $10,937.90 value realized from first O Purchase first; $8,615.43 value realized O Purchase both; $8,615.43 value realized from first, $1,443.73 from second Purchase both; $10,937.90 value realized from first, $1,443.73 from second
Cheyenne has the option to buy two different annuities. The first starts in six years and pays $3,500 per year for five years. The second begins in 10 years and pays $1,800 per year for six years. Currently, Cheyenne is very risk-averse and thus her current required return is 3.2%. In nine years, she expects to be more financially secure and her cost of capital will increase to 17.1% from then on. If each annuity costs $5,000 today, which annuity (or annuities), if any, should Cheyenne purchase? How much value will she realize from the purchase(s), if she makes any purchases? O Purchase first; $10,937.90 value realized from first O Purchase first; $8,615.43 value realized O Purchase both; $8,615.43 value realized from first, $1,443.73 from second Purchase both; $10,937.90 value realized from first, $1,443.73 from second
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Cheyenne has the option to buy two different annuities. The
first starts in six years and pays $3,500 per year for five years.
The second begins in 10 years and pays $1,800 per year for six
years. Currently, Cheyenne is very risk-averse and thus her
current required return is 3.2%. In nine years, she expects to be
more financially secure and her cost of capital will increase to
17.1% from then on. If each annuity costs $5,000 today, which
annuity (or annuities), if any, should Cheyenne purchase? How
much value will she realize from the purchase(s), if she makes
any purchases?
4
O Purchase first; $10,937.90 value realized from first
O Purchase first; $8,615.43 value realized
O Purchase both; $8,615.43 value realized from first, $1,443.73 from
second
Purchase both; $10,937.90 value realized from first, $1,443.73 from
second
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