Question
In: Finance
The Assurance Life Company is offering an insurance policy under either of the following two terms:...
The Assurance Life Company is offering an insurance policy under either of the following two terms:
a. Make a series of twelve $1,200 payments at the beginning of each of the next 12 years (the first payment being made today).
b. Make a single lump sum payment today of $10,000 and receive coverage for the next 12 years.
If you had investment opportunities offering an 8 percent annual return, which alternative would you prefer?
Solutions
Expert Solution
a.
| Discount rate | 8.0000% | ||
| Cash flows | Year | Discounted CF= cash flows/(1+rate)^year | Cumulative cash flow |
| 1,200.000 | 0 | 1,200.00 | 1,200.00 |
| 1,200.000 | 1 | 1,111.11 | 2,311.11 |
| 1,200.000 | 2 | 1,028.81 | 3,339.918 |
| 1,200.000 | 3 | 952.60 | 4,292.52 |
| 1,200.000 | 4 | 882.04 | 5,174.55 |
| 1,200.000 | 5 | 816.70 | 5,991.25 |
| 1,200.000 | 6 | 756.20 | 6,747.46 |
| 1,200.000 | 7 | 700.19 | 7,447.64 |
| 1,200.000 | 8 | 648.32 | 8,095.97 |
| 1,200.000 | 9 | 600.30 | 8,696.27 |
| 1,200.000 | 10 | 555.83 | 9,252.10 |
| 1,200.000 | 11 | 514.66 | 9,766.76 |
PV of the series payment = 9766.76
b. so the series payment is better since the PV is less than the lump sum of 10000
jeff jeffy answered 2 years agoRelated Solutions
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