Question

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 $60,000 day or receive payments of $641 a month for ten years. You can earn 6.5% on your money. Which.ontion should you take and why? (Show all calculations for full credit.

Answer 1

Receiving a lump sum of $60,000 day is better option

Calculation of present value of monthly payment :
Present value of monthly payment		=	Monthly payments	*	Present value of annuity of 1 for 10 years
		=	$             641	*	88.06692
		=	$ 56,450.90
Working:
Present value of annuity of 1		=	(1-(1+i)^-n)/i			Where,
		=	(1-(1+0.005417)^-120)/0.005417			i	6.5%/12	=	0.005417
		=	88.0669212			n	10*12	=	120
It is shown from above calculation that Receiving $ 60,000 today is better option.