QUESTION 2 20 points over (B). An investor must choose between two options. The first option (A) offers AED 10m for AED 2m a year for 5 years. The second option (B) offers AED 11m of AED 1m a year for four years and AED 7m in year 5 (a). Compare the present value of each option by assuming a range of the required rate of return of the investor, say 8%, 0%, 10% 11%, and 12%. What is your advice? 14 A 2 For the foobar press ALT+F10 Por ALT FNF10 (Maci Paragraph Aria a X* X * + ) 2 I 4 0 0 0 5. FB - +] 11 1 WORD POWDY TY we appropriate sections. If you want partial credit please do the 2 things, show calculations, show time diagram **** Make sure you show me the formula and numbers you used if there are calculations ****Make sure you DRAW time diagram and show the Cash Flows on it 1. (A) What are the reasons that the value of a dollar tomorrow is not the same as the value of a dollar today? ANSWER: (B). An investor must choose between two options. The first option (A: Choice 1) offers total AED 10m for AED 2m a year for 5 years. The second option (B: Choice 2) offers AED 11m of AED 1m a year for four years and AED 7m in year 5. First option: Year: 0 1 2 3 4 5 CF: 2m 2m 2m 2m 2m Second Option: Year: 0 1 2 3 5 CF: 1m 1m 1m 7m (a). Compare the present value of each option by assuming a range of the required rate of return of the investor, say 8%, ANSWER: calculate for ONE % given above, do not do it for more than one %, and choose the best option (First or Second). (b). What is your advice to the investor if the economy faces inflationary pressure ? ANSWER:related to the above calculation. If there is inflation will your chango? There is no calculations here, just few lines what percentage is best for investor if there is inflation 4 1m 2. An individual wants to have 1,000,000 AED in 10 years. Suppose she will pay no taxes at the end of the 10 years' investment period. During this time span, she plans on making no withdrawals or deposits. The following are the choices in which she can invest: (1) a savings account earning 3.5% compounded quarterly, (ll) a checking account earning 2.5% compounded monthly, (1) a money market account earning 5.5% compounded semiannually. a. Determine how much the person must save today to reach her goal. ANSWER: b. What is her optimal choice and why