Determining the present value of a lump-sum future cash receipt Cornelius Toran has a terminal illness. His doctors have estimated his remaining life expectancy as three years. Cornelius has a $1,000,000 life insurance policy but no close relative to list as the beneficiary. He is considering canceling the policy because he needs the money he is currently paying for the premiums to buy medical supplies. A wealthy close friend has advised Cornelius not to cancel the policy. The friend has proposed instead giving Cornelius $500,000 to use for his medical needs while keeping the policy in force. In exchange, Cornelius would designate the friend as the policy beneficiary. Cornelius is reluctant to take the $500,000 because he believes that his friend is offering charity. His friend has tried to convince Cornelius that the offer is a legitimate business deal.

Required

a. Determine the present value of the $1,000,000 life insurance benefit. Assume a 10 percent discount rate.

b. Assuming 10 percent represents a fair rate of return, is Cornelius’ friend offering charity or is he seeking to profit financially from Cornelius’ misfortune?