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Charlotte annual discount rate

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Annuity, present value and future value Charlotte is negotiating a prenuptial agreement with Bunny. Under the agreement, Charlotte will be receiving 10% of $500K every three years (with the first payment occurring three years after the wedding). Bunny claims that under the agreement, and provided that the marriage lasts for 30 years, Charlotte is worth $500K.

(a) Charlotte has some doubts, and talks it over with Miranda, who has studied some finance during her law school education. Miranda claims that under the agreement, Charlotte is worth significantly less than $500K. Why is Miranda right, and what is her argument?

(b) Miranda advises Charlotte to negotiate an agreement under which she is worth $700K. What should each of the 10 (equal) payments be, provided that Charlotte's annual discount rate is 4%?

Reference no: EM133069749

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