Answer: The maximum price the parent should pay for this insurance product is the present value of the future cash flows, which is $540,000 for the payments starting in year 5 and the present value of the payment at year 5. To calculate the present value of the payment at year 5, we need to discount it back to its present value using the same opportunity cost of funds of 8% per year, compounded monthly. Assuming the payment is made at the end of year 5, the present value of the payment at year 5 is:
PV = Payment / (1 + Discount Rate)^n
PV = $36,000 / (1 + 0.08/12)^60
PV = $17,533.39
Therefore, the maximum price the parent should pay for this insurance product is the sum of the present value of the payments starting in year 5 and the present value of the payment at year 5:
Maximum Price = $540,000 + $17,533.39
Maximum Price = $557,533.39
So the parent should not pay more than $557,533.39 for this insurance product.
Explanation: Above.