This is not the calculus I know.
Working present value;
Option 1
PV=2600+3000/(1+i) + 3450/(1+i)^2
calculate that with i=.0476
Option 2
PV=3000+3000/(1+i) + 3000/(1+i)^2
calculate that
which is the lower PV? That is the prefered option.
Choice 1: Payments of $ 2600 now,
$3000 a year from now, and $3450 two years from now.
Choice 2: Three yearly payments of $ 3000 starting now.
Interest is compounded continuously.
(a) If the interest rate on savings were 4.76 %,which would you prefer?
(b) What is the interest rate that would make both choices equally lucrative?
2 answers
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