Calculate the expected present value of Coverage A and Coverage B. Clearly identify which option is...

Calculate the expected present value of Coverage A and Coverage B. Clearly identify which option is better for the buyer of insurance.

Expected losses:

10 losses of $10000

6 losses of $15000

3 losses over $15000

Interest rate 5%

Coverage A

Premium $75,000

Deductible $10,000

Coverage B

Premium $35,000

Deductible $15,000

Solutions

Expert Solution

The best term insurance is one that offers the highest sum assured at the lowest possible monthly premium.

Since time period is not mentioned here, calculation is based on 1 year. From the below calculation NPV is higher in coverage B. so, suggest to go with coverage B.

The formula for NPV varies depending on the number and consistency of future cash flows. If there’s one cash flow from a project that will be paid one year from now, the net present value is calculated as follows:

In this equation:

i = Required return or discount rate

t = Number of time periods

jeff jeffy answered 1 year ago

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