Question
John met his insurance agent to discuss the purchase of an insurance plan to fund his 8-year-old daughter's university education in 11 years' time. The
John met his insurance agent to discuss the purchase of an insurance plan to fund his 8-year-old daughter's university education in 11 years' time. The payout from the insurance company is as follows:
Receive $30,000 at the beginning of each year for 4 years with the first receipt starting 11 years from today.
The insurance company had 3 payment proposals:
Proposal 1:
Pay $35,000 today.
Proposal 2:
Beginning 2 years from today, pay $8,000 each year for the next 8 years.
Proposal 3:
Beginning 2 years from today, make payments each year for the next 8 years.
The first payment is $7,000 and the amount increases by 5% each year.
(a) Calculate the present value of each proposal. Use a 10% discount rate.
(b) Which proposal should John choose? Explain.
(c) If the discount rate is not given to you, what would be an appropriate discount rate to use?
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