Question

You inherit $10K when you are 20. What is this worth when you are ready to retire at 65? Assume that the money can be invested at 7%, which is your interest rate for the time value of money. Compare this with an insurance policy that could be purchased with a lump-sum payment of $10K. That policy would pay you $100K at age 65 and your survivors $100K if you die sooner. How much value per year must you put on protecting your survivors for these to be equivalent?

Answer 1

Solution Money inherited , $10,000 at 20- _Money worth at 65 ? Interest rate > 7% = 0,07 No of years 2 65-20 = 45 years LEV = Present blue 11+12 Lfwure Value = $10.000 (1 +0.072 - z $10,000 x 21.0024 = $ 210.034,51 Now lump sum of $10k is investeel that would pares $100K at 65 | But investing at 7% is profitable since it yield more money hat the age 85 To calculate Interest rate of the policej: FV = PV litin $100,000 = $10,000 (1+i)* → $10 = (1+in95 (10)745 = 1+1 1,0525 = Iti lj = 0.0525 or 5.25% To vield $210,024, 51 at 5.25% interest rate of policy the money that needs to be invested is given by a

Date: $ 210,024.51 = Present Value (+ 0.0525)45 $ 210,024.51 Le0525) 45 Present Value 3 $210,024.51 - $ 21,004,55| - 9.999 Therefore a lump sum of $21,004.55 needs to be Linvested at 5e25% interest rate to yielal the same Hamount of money that is yielded by 7% rate