Final answer:
To select the best insurance settlement option when given an investment return of 7.5 percent, the present value of each option must be calculated and compared. Option C offers an $85,000 lump sum payment and is the simplest to evaluate as it is already in present value form. The best option financially is the one with the highest present value.
Step-by-step explanation:
To determine the best insurance settlement option considering a 7.5 percent investment return, we should calculate the present value of each option. Present value is the current worth of a future stream of payments, discounted at a particular rate of return.
Option A offers $1,500 a month for 6 years. Calculating the present value (PV) using a financial calculator or present value formula with the 7.5% annual discount rate will give us the total value of this annuity today.
Option B offers $1,025 a month for 10 years. Again, we calculate the present value using the 7.5% discount rate.
Option C offers an $85,000 lump sum payment today, which doesn't require any calculations as it's already a present value.
After calculating the present values of Options A and B, you would compare them with the $85,000 lump sum. The option with the highest present value is the most advantageous one financially. Given the data presented in the question, Option A's present value will require calculating the present value of an annuity of $1,500 over 72 months (6 years) at 7.5%, and Option B will require calculating the present value of an annuity of $1,025 over 120 months (10 years) at 7.5%.
Without these calculations provided, we cannot definitively suggest which option is the best. However, we do know that Option C would be superior if the present values of both Options A and B are less than $85,000.