An insurance policy offers you the option of being paid $750 per month for 20 years...

An insurance policy offers you the option of being paid $750 per month for 20 years or a lump sum of $50,000. Which has the greater value if the current rate of return is 4.5% compounded monthly and you expect to live for at least 20 years?

(Please work out thoroughly, need to understand the work process)

Solutions

Expert Solution

Option 1:

Monthly Payment = $750
Time Period = 20 years or 240 months

Annual Interest Rate = 4.50% compounded monthly
Monthly Interest Rate = 4.50% / 12
Monthly Interest Rate = 0.375%

Present Value = $750/1.00375 + $750/1.00375^2 + … + $750/1.00375^239 + $750/1.00375^240
Present Value = $750 * (1 - (1/1.00375)^240) / 0.00375
Present Value = $750 * 158.065437
Present Value = $118,549.08

Option 2:

Lump Sum = $50,000

Present Value = $50,000

Option 1 has greater value then Option 2.

jeff jeffy answered 2 years ago

Next > < Previous

Related Solutions

You are the beneficiary of a life insurance policy. The insurance company offers two options for...

You are the beneficiary of a life insurance policy. The insurance company offers two options for receiving the proceeds: a lump sum of $50,000 today or payments of $550 a month for ten years. If you can earn 6%, compounded monthly, which option should you take and why? a. Accept the lump sum because the payments are only worth $49,540.40 today. b. Accept the monthly payments because they are worth $51,523.74 today. c. Accept the payments because they are worth...

Assume that you contribute $260 per month to a retirement plan for 20 years. Then you...

Assume that you contribute $260 per month to a retirement plan for 20 years. Then you are able to increase the contribution to $460 per month for the next 30 years. Given a 6.0 percent interest rate, what is the value of your retirement plan after the 50 years? (Do not round intermediate calculations and round your final answer to 2 decimal places.)

A company paid for a 12-month insurance policy on February 1, 2004 for $3,600 and debited...

A company paid for a 12-month insurance policy on February 1, 2004 for $3,600 and debited the Prepaid Insurance account for the cost of the policy. Assuming no previous adjusting entries have been made, what adjusting entry should be made at March 31, 2004 for the interim financial statements to be properly stated?

Consider an insurance policy that promises to pay the holder $788 per month for the next...

Consider an insurance policy that promises to pay the holder $788 per month for the next 20 years. The first payment will be one month after the purchase of the policy. (This type of policy is called a term annuity.) The appropriate discount rate is an APR of 8.98%, compounded monthly. What is the value of this policy? Round your answer to the nearest dollar.

Consider an insurance policy that promises to pay the holder $972 per month for the next...

Consider an insurance policy that promises to pay the holder $972 per month for the next 20 years. The first payment will be one month after the purchase of the policy. (This type of policy is called a term annuity.) The appropriate discount rate is an APR of 6.52%, compounded monthly. What is the value of this policy? Round your answer to the nearest dollar.

The beneficiary of a life insurance policy will receive payments of $722 per month for 18...

The beneficiary of a life insurance policy will receive payments of $722 per month for 18 years. At an annual interest rate of 5%, what is the value of the monthly payment stream in today’s dollars?

If an insurance company offers you annuity payments of $45,000 per year for the first 12 years of retirement and $52,000 per year for the next 12 years

If an insurance company offers you annuity payments of $45,000 per year for the first 12 years of retirement and $52,000 per year for the next 12 years, what would you be willing to pay for this annuity if you have a required rate of return of 6%? Assume beginning of year payments

You have one apartment to lease, and the quoted rent is $750 per month. The lease...

You have one apartment to lease, and the quoted rent is $750 per month. The lease term is 12 months. A concession of one month’s free rent is being given in the market, and you are concerned about how this will affect property revenues if one month’s free rent is needed to seal the lease deal. What would the effective rent be for the year if no concession is granted? What would the effective rent be for the one-year term...

On May 1 a business paid $4,800 for twelve-month liability insurance policy. Also on June 1,...

On May 1 a business paid $4,800 for twelve-month liability insurance policy. Also on June 1, the same business entered into a twelve-month rental contract for equipment for $12,000. Determine the following amounts: (a) prepaid insurance as of May 31, (b) prepaid rent as of June 30 (c) insurance expense for May and rent expense for June. (a) (b) (c) There was a $1,500 balance in the supplies account at the beginning of the period. During the period, the supplies...

Prudent policy life insurance co. offers a 10 year term life insurance policy with a $250000...

Prudent policy life insurance co. offers a 10 year term life insurance policy with a $250000 benefit and annual premiums of $200, paid at the beginning of each year. If prudent can earn 8% on invested capital, what is the present value to the firm of the premiums from one policy, assuming the policy holder outlives the policy term?

Subjects