You are considering two insurance offers. The first offer are annual payments of $50,000 for 5...

You are considering two insurance offers. The first offer are annual payments of $50,000 for 5 years with the first payment made at the end of the first year. The other offer is the payment of one lump sum amount today. You are trying to decide which offer to accept given the fact that your discount rate is 12 percent. What is the minimum amount that you will accept today if you are to select the lump sum offer?

	a.	$180,238.81
	b.	$195,618.19
	c.	$201,867.47
	d.	$197,548.43
	e.	$214,142.50

Expert Solution

What is the minimum amount that you will accept today if you are to select the lump sum offer

=CF/(1+r)^1+CF/(1+r)^2+CF/(1+r)^3+CF/(1+r)^4+CF/(1+r)^5

=CF*((1-(1+r)^(-n))/r)

=50000*((1-(1+12%)^(-5))/12%)

=180238.81

the above is answer..

jeff jeffy answered 2 years ago

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