Financial Management
Question 1
John met his insurance agent to discuss the purchase of aninsurance plan to fund his 8 year-old daughter's universityeducation in 11 years' time. The payout from the insurance companyis as follows:
* Receive $30,000 at the begining of each year for 4 years withthe first receipt starting 11 years from today.
The insurance company had 3 payment proposals:
Proposal 1:
* Pay $35,000 today
Proposal 2:
* Beginning 2 years from today, pay $8,000 each year for thenext 8 years.
Proposal 3:
* Beginning 2 years from today, make payments each year for thenext 8 years. The first payment is $7,000 and the amount increasesby 5% each year.
(a) Calculate the present value of each proposal. Use a 10%discount rate. (7m)
(b) Which proposal should John choose? Explain. (5m)
(c) If the discount rate is not given to you, what would be anappropriate discount rate to use? (3m)
