You are the beneficiary of a life insurance policy. The insurance company inform

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 $50,000 today or receive payments of $641 a month for ten years. You can earn 6.5% on your money. Which option should you take and why?
a. You should accept the payments because they are worth $56,451.91 today.
b. You should accept the payments because they are worth $56,523.74 today.
c. You should accept the payments because they are worth $56,737.08 today.
d. You should accept the $50,000 because the payments are only worth $47,757.69 today.
e. You should accept the $50,000 because the payments are only worth $47,808.17 today.

Explanation / Answer

a. You should accept the payments because they are worth $56,451.91 today.

Analysis :

interest = 6.5 % = 0.065 = 6.5 / 100

total years = 10

total months 10*12 =120

APV = 641 * (1 - 1 / (1+0.065/12)^120 ) / (0.065 /12) = 641 * 88.06849971992578 = 56451.91

thus ans.

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