Identify which of the two annuities would be a better option

Reference no: EM132115935

Assignment -

Client's Investments:

1. A possible investment pays $20,000 in 2 years, $40,000 in 5 years and a further $80,000 in 8 years. The interest rate over the period of the investment is a nominal 6% p.a., compounded monthly. If your client can buy the investment today for $60,000 would you recommend that this is a good investment? Why or why not?

2. Your client has identified a number of investment possibilities indicated below:

The first investment option, which costs $50,000 is an annuity and pays $8,000 each year for 15 years.

The second investment option pays $6,000 a year (in perpetuity) from year 4 onwards, and costs $25,000.

The third investment costs $150,000 and pays the following cash flows in years 2 to 7:

Yr 2: $30,000, Yr 3: $35,000, Yr 4: $40,000, Yr 5: $45,000, Yr 6: $50,000 and Yr 7: $55,000.

Identify, for your client, which of these investments are good investments, assuming that the rate of return on investment is 14% p.a. for your client.

3. Your client has identified two annuities that are available for purchase. The first annuity pays $1,000 at the end of each month over a 3-year period at a nominal rate of 13% p.a. The second annuity pays $3,000 at the end of each three-month (quarterly) period, again over 3 years, at a nominal rate of 12% p.a., but has an annual fee of $250, paid at the beginning of each year. Identify which of the two annuities would be a better option for your client.

Reference no: EM132115935

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