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4. Recently, I want to choose an insurance program for my family, there are 2 proposals: 1. The premium is $11854 per year, I

Subject Name:International Financial Management

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Answer #1
For choosing one of two proposals, we need to calculate NPV od both the proposals and choose the project with higher NPV
NPV = Present Value of Sum assured - Present Value of Premiums
Calculation of Present Value of Sum assured
Proposal 1 Proposal 2
Sum Assured $1,000,000 $150,000
Present Value factor - 10th year 0.3855433
Present Value factor - 25 th year 0.092296
Present Value
(Sum Assured * PV factor)		 $385,543.30 $13,844.40
Calculation of Present Value of Premiums
Proposal 1 Proposal 2
Sum Assured $11,854 $1,222.50
Present Value Annuity factor of 10year 6.1446
Present Value Annuity factor of 25 year 9.077
Present Value
(Sum Insures * PV factor)		 $72,838.09 $11,096.63
Calculation of NPV
Proposal 1 Proposal 2
Present Value of Sum Assured $385,543.30 $13,844.40
Present Value of Premiums $72,838.09 $11,096.63
NPV $312,705.21 $2,747.77
NPV of Proposal 1 is higher than Proposal 2, So Proposal 1 is better
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