Question

Longstreet died, leaving an insurance policy to his heir, Stuart. The contract provides that the beneficiary can choose any one of the following four options:

1. A) $550,000 immediate cash

2. B) $40,000 every three months, payable at the end of each quarter for five years

3. C) $180,000 immediate cash and $18,000 every three months for ten years, payable at the beginning of each

   three-month period

4. D) $40,000 every three months for three years and $15,000 each quarter for the following twenty-three

   quarters, all payments payable at the end of each quarter.

Stuart has come to you to ask for assistance and your advice. If money is discounted at a rate of 8% annually, which option would you recommend (in terms of pure value calculation)?

(Show how to get 1.02 as well)

Answer 1

Stuart should select option D (Option #4) having highest PV of $697,397.