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PART TWO Financial Tools Personal Finance Problem P5-25 Value of an annuity versus a single amount Assume that you just won the stateix tery. Your prize can be taken either in the form of $40,000 at the end of each of the next 25 years (i.e., $1,000,000 over 25 years) or as a single amount of $500,00 paid immediately. a. If you expect to earn 5% annually on your investments over the next 23 years ignoring taxes and other considerations, which alternative should you take: b. Would your decision in part a change if you could earn 7% rather than your investments over the next 25 years? Why? c. At approximately what interest rate would you be indifferent between the two options? Determine the present value of each perpetuity. P5-27 Perpetuities Suppose you have been offered an investment opportunity that will per you $500 at the end of every year, starting 1 year from now and continuing for Assume the relevant discount rate is 6%. a. What is the maximum amount you would pay for this investment? b. What would you pay if the first cash flow from this investment comes imme. ately, and the following cash payments of 500 after 1 year thereafter. c. Suppose the first cash flow from this investment is 4 years from now; that is the first payment will be made at the end of fourth year and will continue every year thereafter. How much is this worth to you today

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