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Problem 6-5 Julia Baker died, leaving to her husband Morgan an insurance policy contract that provides...

Problem 6-5 Julia Baker died, leaving to her husband Morgan an insurance policy contract that provides that the beneficiary (Morgan) can choose any one of the following four options. Money is worth 2.50% per quarter, compounded quarterly. Compute Present value if: Click here to view factor tables (a) $56,790 immediate cash. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.) Present value $ Link to Text Link to Text (b) $4,020 every 3 months payable at the end of each quarter for 5 years. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.) Present value $ Link to Text Link to Text (c) $19,080 immediate cash and $1,908 every 3 months for 10 years, payable at the beginning of each 3-month period. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.) Present value $ Link to Text Link to Text (d) $4,020 every 3 months for 3 years and $1,630 each quarter for the following 25 quarters, all payments payable at the end of each quarter. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.) Present value $ Link to Text Link to Text Which option would you recommend that Morgan exercise? Click if you would like to Show Work for this question: Open Show Work

Solutions

Expert Solution

Solution :

Plan a: $56,790 immediate cash

Present value = $56,790

Plan b: $4,020 every 3 months payable at the end of each quarter for 5 years

Present value = $4,020 * Cumulative PV Factor at 2.50% for 20 periods

= $4,020 * 15.58916

= $62,668

Plan c: $19,080 immediate cash and $1,908 every 3 months for 10 years, payable at the beginning of each 3-month period.

Present value = $19,080 + $1,908 * Cumulative PV factor at 2.50% for 40 periods of annuity due

= $19,080 + $1,908 * 25.73034

= $68,173

Plan d: $4,020 every 3 months for 3 years and $1,630 each quarter for the following 25 quarters, all payments payable at the end of each quarter.​​​​​​​

Present value = $4,020 * Cumulative PV Factor at 2.50% for 12 periods + $1,630 * Cumulative PV factor at 2.50% for 13th period to 37th period

= $4,020 * 10.25776 + $1,630 * 13.69955

= $63,566

Present value of option c is the highest, therefore we will recommend option c to exercise.


ekkarill92 answered 10 months ago
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