Question 1

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.

(7 marks)

(b) Which proposal should John choose? Explain.

(5 marks)

(c) If the discount rate is not given to you, what would be an appropriate discount rate to use?

(3 marks)