Julia Baker died, leaving to her husband Brent an insurance policy contract that
ID: 2461381 • Letter: J
Question
Julia Baker died, leaving to her husband Brent an insurance policy contract that provides that the beneficiary (Brent) can choose any one of the following four options. Money is worth 2.50% per quarter, compounded quarterly. Compute Present value if: (Use the tables below.) a. $4,185 every 3 months for 3 years and $1,490 each quarter for the following 25 quarters, all payments payable at the end of each quarter. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)
Explanation / Answer
Use the PV-of-ordinary-annuity formula twice. Once to value the cash flow sequence of 4,185 which begins now (first payment received 3 months from today) and runs for 12 quarters.
Second, treat the 1,490 x 25 quarters as a separate annuity. Use the PV-o-o-a formula to determine its value as of the end of the 12th quarter (its first payment occurs at the end of the 13th qtr). But then as a second step you'll need to discount that single amount back to its present value today.
Then just add the two separate annuity PVs.
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