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Calculate the present value of proposal

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Question 1

John met his insurance agent to discuss the purchase of an insurance plan to fund his 8-year-old daughter's university education in 11 years' time. The payout from the insurance company is as follows:

  • Receive $30,000 at the beginning of each year for 4 years with the 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 the next 8 years.

Proposal 3:

  • Beginning 2 years from today, make payments each year for the next 8 years.
  • The first payment is $7,000 and the amount increases by 5% each year.

(a) Calculate the present value of each proposal. Use a 10% discount rate.

(b) Which proposal should John choose? Explain.

(c) If the discount rate is not given to you, what would be an appropriate discount rate to use?

Reference no: EM132699129

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