Question

4. You are the beneficiary of a life insurance policy. The insurance company informs you that you have two options for receiving the insurance proceeds. You can receive a lump sum of$125,000 today or receive payments of $4,000 a month for forty months. You can earn 12 percent per year on your money.

Which option would you take?

a) Accept the payments because they are worth $126,570 today.

b) Accept the payments because they are worth $131,338 today.

c) Accept the payments because they are worth $143,820 today.

d) Accept the $125,000 lump sum because the payments are only worth $88,937 today.

e) Accept the $125,000 lump sum because the payments are only worth $117,588 today.

f) Accept the $125,000 lump sum because the payments are only worth $124,261 today.

Show your work

Answer 1

Calculating Present Value of periodic payments,

Using TVM Calculation,

PV = [FV = 0, PMT = 4,000, N = 40, I = 0.12/12]

PV = $131,338

Accept the payments because they are worth $131,338 today