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.

 

 

 

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

 

 

 

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

 

 

 

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