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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

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.

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

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

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

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