Quick Courier Service is about to purchase insurance on its new delivery van. Taylor, the manager, has the companys insurance agent outline three payment plans to provide coverage for the next 12 months.

Plan One requires that the full years premium of $4000 be paid at the beginning of the year.

Plan Two allows payment of the annual premium in two installments. The first installment would have to be paid immediately and would amount to one-half of the annual premium, plus a $60 service charge. The second installment would be paid in six months time, and would amount to the remaining half of the premium.

Plan Three allows for twelve equal monthly payments of $355 each. These payments would be made on the same date within each month, starting immediately. Quick Courier Service pays its insurance using Plan One. However, the company realizes that it is missing out on interest it could have earned on this money when it pays the full years premium at the beginning of the policy term. Taylor considers this to be the cost of paying its bill in one lump sum. Taylor is interested in knowing the cost of its insurance payment options.

a. Suppose Quick Courier Service could earn 4% p.a. simple interest on its money over the next year. Assume the first premium payment is due today (the first day of the insurance policy term) and the focal date is one year from today. Ignoring all taxes, compute the cost to Quick Courier Service of paying the insurance using each of the three payment plans.

b. Suppose Quick Courier Service expects to earn 2.5% p.a. simple interest on any money it invests in the first three months of this year, and 1.8% p.a. simple interest on any money it invests during the rest of this year. Assume the focal date is one year from today. Which optionPlan One, Plan Two, or Plan Threewill have the least cost for the company?

c. Examine a vehicle insurance policy of your own or of a family member. Calculate what you could earn on your money at todays rates of interest. What is the cost of this insurance policy if you pay the annual premium at the beginning of the policy term? Make the focal date the first day of the policy term.