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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.
- Find the value today of each alternative.
- Is each alternative acceptable that is, worth $30,000 today?
- Which alternative, if any, would you take?
- Find the rate of return for both alternatives A and B. Compare these alternative investments using the rate of return.
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