Suppose a homeowner is offered a choice between two payment schedules on his mortgage.
Schedule A has a fixed payment of $5000 per year, while Schedule B requires payment of $4000 for the first three years, after which it rises to $5500.
Assume the market interest rate is 5%. Calculate the present value of the payments made under each schedule.
Which is the better deal? FOR PURPOSES OF THIS QUESTION, ASSUME PAYMENTS GO ON FOREVER, NOT JUST FOR SOME FIXED NUMBER OF YEARS.