Question

You are considering two insurance settlement offers. The first offer includes annual payments of $36,000, $42,000, and $50,000 over the next three years, respectively, with the first payment being made one year from today. The other offer is the payment of one lump sum amount today. The relevant discount rate is 7 percent. What is the minimum amount you should accept today if you are to select the lump sum offer?

Answer 1

The answer is: Today you could accept any lump sum ≥ $111,144.18

Step-by-step explanation:

First we must calculate the present value of the three cash flows. We can do it manually or in an excel spreadsheet using the PV formula.

Using an excel spreadsheet the present value is $111,144.18

Today you could accept any lump sum ≥ $111,144.18

You can do this calculation manually also:

pv = [$36,000 / (1 + 7%)] + [$42,000 / (1 + 7%)²] + [$50,000 / (1 + 7%)³] = $111,114.18