Bank account at the end of the 8 year period

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(a) An investment advisor offers a product to Tommy that will deliver cash flows at the end of each of the next seven years. The first cash flow is $5 million and every year thereafter the cashflow will grow at a rate of 4%. If the annual interest rate is 2%, calculate the present value of this opportunity.

(b) To maintain a good relationship with the bank, Tommy is forced to deposit cash with the bank as collateral for loans to his businesses. At the end of each of the next 8 years, Tommy has to put $2.5 million cash in the bank. If the annual interest rate is 3%, what is the present value of this planned savings stream? What will be the balance in his bank account at the end of the 8 year period?

Reference no: EM132382550

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