Question

Problem 6-5 Julia Baker died, leaving to her husband Leon an insurance policy contract that provides that the beneficiary (Leon) can choose any one of the following four options. Money is worth 2.50% per quarter, compounded quarterly. Compute Present value if: Click here to view factor tables (a) $55,240 immediate cash. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.) Present value $ 55240 (b) $4,090 every 3 months payable at the end of each quarter for 5 years. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.) Present value $ (c) $19,000 immediate cash and $1,900 every 3 months for 10 years, payable at the beginning of each 3-month period. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.) Present value $ (d) $4,090 every 3 months for 3 years and $1,590 each quarter for the following 25 quarters, all payments payable at the end of each quarter. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.) Present value $ Which option would you recommend that Leon exercise?

Answer #1

1.

=55240

2.

Using calculator, set the mode END

I/Y=2.5%

N=5*4

PMT=4090

FV=0

CPT PV=$63,759.67

3.

Using calculator, set the mode BGN

I/Y=2.5%

N=10*4

PMT=1900

FV=0

CPT PV=$48,887.65

PV of immediate cash of 19000=19000

Total Present Value=$48,887.65+$19,000=$67,887.65

4.

Using calculator, set the mode END

I/Y=2.5%

N=25

PMT=1590

FV=0

CPT PV=$29,294.76

This is PV at the end of 3 years

We now compute the pv of 1590 today

I/Y=2.5%

N=3*4

PMT=0

FV=x

CPT PV=$21,782.29

This will be the present value of $1590 payments

Using calculator, set the mode END

I/Y=2.5%

N=3*4

PMT=4090

FV=0

CPT PV=$41,954.26

Total Present Value=$21,782.29+$41,954.26=$63,736.55

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