Question

4. You are the beneficiary of a life insurance policy. The insurance company informs you that you have two options for receiving the insurance proceeds. You can receive a lump sum of $150,000 today or receive payments of $1,627.89 a month for 10 years. You can earn 7.5 percent on your money. Which option should you take and why?

Answer 1

There are two Options :

Lumpsum Amount today = $ 150,000/-

Receive Payment for 10 years = $ 1,629.89 /month

Yearly Payment received = $ 1,629.89 *12 = $19,534.68 / year

Year PVF Yearly Payments PV of Yearly Payments Received HNMON =1/1.075 =+C13/1.075 =+C14/1.075 =+C15/1.075 =+C16/1.075 =+C17/1.075 =+C18/1.075 =+C19/1.075 =+C20/1.075 =+C21/1.075 =1627.89*12 =1627.89*12 =1627.89*12 =1627.89*12 =1627.89*12 =1627.89*12 =1627.89*12 =1627.89*12 =1627.89*12 =1627.89*12 Present value =+D13*C13 =+D14*C14 =+D15*C15 =+D16*C16 =+D17*C17 =+D18*C18 =+D19*C19 =+D20*C20 =+D21*C21 =+D22*C22 =SUM(E13:E22)

Year PVF Yearly Payments PV of Yearly Payments Received 0.930 19,534.68 0.865 19,534.68 0.805 19,534.68 0.749 19,534.68 0.697 19,534.68 0.648 19,534.68 0.603 19,534.68 0.561 | 19,534.68 .522 19,534.68 .485 19,534.68 Present value 18171.80 16904.00 15724.65 14627.58 13607.05 12657.72 11774.62 10953.14 10188.97 9478.11 1,34,087.62 8 9 0 100

Since the Present value of Option 2 is less than the lump sum amount. It would be beneficial to take $ 1,50,000 in lumpsum.