Question

As the beneficiary of a life insurance policy, you have two options for receiving the insurance proceeds. You can receive a lump sum of $255,000 today or receive payments of $2,000 a month for 18 years. If you can earn 6 percent (APR) on your money, which option should you take and why?

	A.	You should accept the payments because they are worth $263,796 today.
	B.	You should accept the payments because they are worth $259,111 today.
	C.	You should accept the payments because they are worth $432,000 today.
	D.	You should accept the $250,000 because the payments are worth only $205,779 today
	E.	You should accept the $250,000 because the payments are worth only $228,857 today

Answer 1

Option 1: Lump sum of $255,000 today.

The present value of option 2 needs to be calculated.

Information provided:

Monthly payment= $2,000

Time= 18 years*12= 216 months

Interest rate= 6%/12= 0.50% per month

The present value is calculated by entering the below in a financial calculator:

PMT= 2,000

N= 216

I/Y= 0.50

Press the CPT key and PV to calculate the present value.

The value obtained is 263,795.75.

Therefore, the payments are worth $263,795.75 today.

Hence, you should accept the payments since they are worth $263,796 today.

The answer is option a.