You are evaluating two alternative financing arrangements. The first arrangement requires twenty annual payments with...
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You are evaluating two alternative financing arrangements. The first arrangement requires twenty annual payments with the first payment of $10,000 made in a year, while the second arrangement requires that each payment be made a year earlier but is otherwise similar to the first arrangement. (a) If payments subsequent to the first increase at an annual rate of 5%, and the financiers require a 10% return on both arrangements, calculate how much more capital the financiers would be willing to provide under the second arrangement. (7 marks) (b) If payments are level, and the financiers require a 10% return on both arrangements, calculate how much more capital would the financiers be willing to provide under the second arrangement? (7 marks) (c) Explain why financiers are willing to provide more capital under the second arrangement in parts (a) and (b).
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