Explain the required rate of return

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i) Mechelle is thinking about investing in two different financial products. The first instrument will pay nothing for three years, but then it will pay $25,000 per year for four years. The second product will pay $25,000 for three years and $35,000 in the fourth year. All payments are made at year-end. If your required rate of return on these investments is 7.5 percent annually, what should you be willing to pay for

a. The first instrument

b. The second instrument (use the formula for a four-year annuity)

ii) Starting 18 years from now, Ariana will be sending her daughter to college for four years. She has already saved for her child's tuition but must plan for other college costs like room and board. She estimates these costs at $22,000 per year by the time her daughter gets to college. If she starts next year and makes 17 payments into a savings account earning 5 percent annually, what annual payments must she make?

Reference no: EM133120264

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