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CFA Level 1
Quantitative Methods

Comparing Annuities and Perpetuities

Very Hard Time Value Of Money Annuities And Perpetuities

Maria is evaluating two investment options based on their cash flows. The first investment provides an annual payment of $3,000 at the end of each year for 5 years. The second investment provides a perpetuity starting at the end of year 6, paying $2,500 annually. Maria requires a 6% return on her investments. To determine which option is more valuable, she needs to calculate the present value (PV) of both cash flows.

What is the correct interpretation of the present values of these two investment options at the end of year 0?

Hint

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% Correct83%