Two investment options are as follows. Choice 1: Payments of $ 2550 now, $ 3100 a year from now, and $ 3720 two years from now. Choice 2: Three yearly payments of $ 3100 starting now. Assume interest is compounded continuously.What is the interest rate that would make both choices equally lucrative?
The present value of Choice 1 is 2550 + 3100/e + 3720/e^2. The present value of Choice 2 is 3100/e + 3100/e^2 + 3100/e^3. Setting these two equations equal to each other and solving for e, we get e = 1.097. The interest rate is then 9.7%.
