Randy had two term policies to compare with costs as shown below. Calculate the
ID: 2700795 • Letter: R
Question
Randy had two term policies to compare with costs as shown below. Calculate the NPV at a 6 percent after-tax discount rate. Which one should she select and why?
Year
A
B
1
$225
$300
2
$275
$310
3
$350
$320
4
$400
$330
5
$500
$340
NPV of Policy A =
(Round your answer to the nearest whole dollar. Omit the comma, +/- sign, and "$" sign in your response)
NPV of Policy B =
(Round your answer to the nearest whole dollar. Omit the comma, +/- sign, and "$" sign in your response)
Which one should she select?
(Enter "Policy A" or "Policy B" in the block below)
Year
A
B
1
$225
$300
2
$275
$310
3
$350
$320
4
$400
$330
5
$500
$340
Explanation / Answer
NPV of A = 225/1.06+275/1.06^2+350/1.06^3+400/1.06^4+500/1.06^5 = 1441.346. NPV of B = 300/1.06+310/1.06^2+320/1.06^3+330/1.06^4+340/1.06^5 = 1343.055. These represent costs. So as NPV of B is lower, she should select plan B.
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