James will be offered the following stream of payments over the next 5 years: $500 at...

  

Transcribed Image Text:

James will be offered the following stream of payments over the next 5 years: $500 at the end of 1st year, $200 at the end of 2nd year, $200 at the end of the 3rd year, $100 at the end of 4th year, and $200 at the end of 5th year. Alternatively, he can have a lump sum of $1100 immediately. He expects to earn 5.5% annual interest compounded semi-annually on his investments. (a) (5 marks)Which offer does he prefer (think carefully of what interest rate to use)? (b) (2 marks)What is the minimum amount he would accept now instead of getting the stream of investment payments? James will be offered the following stream of payments over the next 5 years: $500 at the end of 1st year, $200 at the end of 2nd year, $200 at the end of the 3rd year, $100 at the end of 4th year, and $200 at the end of 5th year. Alternatively, he can have a lump sum of $1100 immediately. He expects to earn 5.5% annual interest compounded semi-annually on his investments. (a) (5 marks)Which offer does he prefer (think carefully of what interest rate to use)? (b) (2 marks)What is the minimum amount he would accept now instead of getting the stream of investment payments?