Question

You are the beneficiary of a life insurance policy. The insurance company informs you that you have two options for receiving the insurance proceeds. You can receive a lump sum of $200,000 today or receive payments of $1,400 a month for 20 years. You can earn 6 percent on your money.

1. Which option should you take and why?
A. You should accept the payments because they are worth $209,414 to you today.B. You should accept the payments because they are worth $247,800 to you today.C. You should accept the payments because they are worth $336,000 to you today.D. You should accept the $200,000 because the payments are only worth $189,311 to you today.E. You should accept the $200,000 because the payments are only worth $195,413 to you today.

Answer 1

From the given options, Option E is correct

Step-by-step explanation:

The present value needs to be calculated in this case. As per the information that has been provided, the present value of monthly payments is calculated as follows

Present value of monthly payments =$1,400/(1+06%/12)+$1,400/(1+6%/12)^2 ....+$1,400/(1+06%/12)^240

=$195,413.08

E. You should accept the $200,000 because the payments are only worth $195,413 to you today.

Thus, the option E is correct from the given options