Evaluate the present value of the annual cost

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Problem - Cost of Insurance Plans - Johnson Company is considering three different time periods for an insurance policy on its main office building. The premiums on a fire insurance policy covering the building for the amount of $2,000,000 on a 1 -year, 3 -year, and 5 -year basis are as follows:

1 year $4,480

3 years 11,200

5 years 17,920

In each case, the entire premium for the full term of the policy is payable at the beginning of the year in which the policy is purchased.

Required - Evaluate the present value of the annual cost of each insurance plan assuming a 12% compounded annual discount rate. Which plan do you recommend? State the savings for the company.

Reference no: EM132882984

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