You plan to buy an insurance policy for $30,000 today. The insurance company allows you to choose one of the alternatives given below.

 

Your opportunity cost of capital is 10% per annum, compounded quarterly.

 

A - A single amount of $51,500 at the end of five years.

 

B - Payment of $3,100 at the end of every three months for three years.

 

C - A perpetual annual payment of $3,100. Payments are made at the end of each year.

 

Use a financial calculator where appropriate.

 

1. Find the value today of each alternative.

 

 

 

2. Is each alternative acceptable - that is, worth $30,000 today?

 

 

 

3. Which alternative, if any, would you take?

 

 

 

4. Find the rate of return for both alternatives A and B. Compare these alternative investments using the rate of return.

Answer rating: 100% (QA)

To find the value today of each alternative we need to calculate the present value PV of the cash flows associated with each alternative using the opportunity cost of capital of 10 per annum compounde... View the full answer