Assume that you have just started business as an actuarial consultant and are faced with two choices in terms of long term, full-time contracts. (If you take one, you cannot take the other).

a. The US government has offered you a 3-year fixed contract, where you

will receive end of year payments of $60,000 next year, $70,000 the year after and $75,000 in the third year.

b. You can work with a software company and write the apps to calculate life insurance reserves that they will then package and sell to insurance companies. The contract will last 5 years and you will get payment equal to 20% of the after-tax net profits on sales. The after-tax net profits are expected to be $200,000 next year and grow $50,000 each year for the following four years.

The US Treasury Bond rate is 3%, the beta for software companies is 1.20 and the market risk premium is 5%.Which contract would you take and why?

Answer rating: 100% (QA)

To determine which contract is more favorable we need to calculate the present value of the cash flows associated with each contract and compare them ... View the full answer