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Choice 1: Payments of $ 2600 now,
$3000 a year from now, and $3450 two years from now.

Choice 2: Three yearly payments of $ 3000 starting now.

Interest is compounded continuously.

(a) If the interest rate on savings were 4.76 %,which would you prefer?

(b) What is the interest rate that would make both choices equally lucrative?

  • calculus -

    This is not the calculus I know.

    Working present value;
    Option 1
    PV=2600+3000/(1+i) + 3450/(1+i)^2
    calculate that with i=.0476
    Option 2
    PV=3000+3000/(1+i) + 3000/(1+i)^2
    calculate that

    which is the lower PV? That is the prefered option.

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