Question

CRAIG CASE

(a).

As a settlement for an insurance? claim, Craig was offered one of two choices. He could either accept a? lump-sum amount of $7908 now, or accept monthly payments of $182 for the next four years.

If the money is placed into a trust fund earning 5.37 % compounded quarterly ,which is the better option and by how? much?

The______monthly payments lump sum option is better by $___.

?(Round the final answer to the nearest cent as needed. Round all intermediate values to six decimal places as? needed.)

(b).

What is the discounted value of $ 1554.00 paid at the end of every six months for 5 years if interest is 6 % per annum compounded annually for Craig ?The discounted value is $___.

?(Round the final answer to the nearest cent as needed. Round all intermediate values to six decimal places as? needed.)

Answer 1

a.

Interest rate compounded quiarterly, so effective annual rate is calculated below:

Effective annual rate = [(1 + 5.37% / 4) ^ 4] - 1

= 1.0548 - 1

= 5.48%

Effective annual rate is 5.48%.

Present value of monthly payment for 4 year is calculated in excel and screen shot providedbelow:

Present value of monthly payment is $7,828.98.

Lump Sum payment = $7,908

Lump Sum payment is higher than present value of monthly payment. So, Lump Sum payment is better than monthly payment.

Lump Sum amount better by = $7,908 - $7,828.98

= $79.02

Lump Sum payment is better by $79.02.

b.

Discounted value that is present value is calculated in excel and screen shot provided below:

Discounted value that is present value is $13,255.94.