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 ago
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