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Financial Management Question 1 John met his insurance agent to discuss the purchase of an insurance plan to...

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Finance

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)

Answer & Explanation Solved by verified expert
4.1 Ratings (651 Votes)
Evaluating the PV of the Proposals Proposal 1 PV35000 Proposal 2 Beginning 2 years from today pay 8000 each year for the next 8 years PV at end Yr 2 of the PV of ordinary annuity of 8000 for i10 n8 ie PV at yr 2 end of 8000111801 iePV at Yr 2 end of of 4267981 ie4267981112 3527257 Proposal 3 Beginning 2 years from today make    See Answer
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