Financial Management Question 1 John met his insurance agent to discuss the purchase of an insurance plan to...

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Finance

Financial Management
Question 1
John met his insurance agent to discuss the purchase of aninsurance plan to fund his 8 year-old daughter's universityeducation in 11 years' time. The payout from the insurance companyis as follows:
* Receive $30,000 at the begining of each year for 4 years withthe first receipt starting 11 years from today.
The insurance company had 3 payment proposals:
Proposal 1:
* Pay $35,000 today
Proposal 2:
* Beginning 2 years from today, pay $8,000 each year for thenext 8 years.
Proposal 3:
* Beginning 2 years from today, make payments each year for thenext 8 years. The first payment is $7,000 and the amount increasesby 5% each year.
(a) Calculate the present value of each proposal. Use a 10%discount rate. (7m)
(b) Which proposal should John choose? Explain. (5m)
(c) If the discount rate is not given to you, what would be anappropriate discount rate to use? (3m)

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4.1 Ratings (651 Votes)

Evaluating the PV of the Proposals Proposal 1 PV35000 Proposal 2 Beginning 2 years from today pay 8000 each year for the next 8 years PV at end Yr 2 of the PV of ordinary annuity of 8000 for i10 n8 ie PV at yr 2 end of 8000111801 iePV at Yr 2 end of of 4267981 ie4267981112 3527257 Proposal 3 Beginning 2 years from today make See Answer

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