Question

" You have your choice of two investment accounts. Investment A is a 13-year annuity that features end-of-month $1,100 payments and has an interest rate of 7.5 percent compounded monthly. Investment B is a 7 percent continuously compounded lump sum investment, also good for 13 years. How much money would you need to invest in B today for it to be worth as much as Investment A 13 years from now?" Excerpt From: Ross, Stephen. "Fundamentals of Corporate Finance, 11th Edition." Apple Books.

Answer 1

Answer:

Investment A

Use a financial calculator

Pv=0

N= 13*12=156

I=7.5/12=0.625

PMT= 1100

Compute FV= 289,191

Investment B

FV= 289,191

N=13

I=7

PMT=0

Compute PV= 120,003

You will have to invest $120,003 in investment B today for it to be worth as much as Investment A in 13 years

Explanation: