Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Ms . Echols is the owner and beneficiary of a $ 1 5 0 , 0 0 0 insurance policy on her mother s life.

Ms. Echols is the owner and beneficiary of a $150,000 insurance policy on her mothers life. Ms. Echols has paid $46,000 premiums, and the policy is fully paid up (no more premiums are due). She needs money and is considering cashing in the policy for its $95,000 cash surrender value. Alternatively, she can borrow $70,000 against the policy from the insurance company. She will pay 5 percent annual interest (a nondeductible personal expense) and repay the loan from the death benefit. Ms. Echolss mother is in poor health and should live no more than 10 years. Ms. Echolss marginal tax rate on ordinary income is 24 percent. Use Appendix A and Appendix B.
Required:
Compute the tax cost and the after-tax cash flow if Ms. Echols surrenders the policy for her immediate cash requirement.
Assuming a 6 percent discount rate, compute the NPV of the after-tax cash flow if she instead opts to borrow against the policy. Assume her mother dies on the last day of year 9.
Assuming a 6 percent discount rate, should she cash in the policy or borrow against it?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Public Finance

Authors: Harvey Rosen, Ted Gayer

10th edition

9781259716874, 78021685, 1259716872, 978-0078021688

More Books

Students also viewed these Finance questions

Question

Explain the steps involved in training programmes.

Answered: 1 week ago

Question

What role will relationships with coworkers play in your life?

Answered: 1 week ago

Question

What type of people will you work with/around/for?

Answered: 1 week ago

Question

What type of earnings and benefits will you receive?

Answered: 1 week ago