You have been asked to determine present present value of the future cash flow.

Question

You have been asked to determine present present value of the future cash flow. Use a present the amount of cash that Daisy's friend should give her. the result you determined in Requirement a. determining the present value of a lump-sum future cash receipt cooper three years. has a terminal illness His doctors have estimated his remaining life expectancy as ciary ross has a $600,000 life insurance policy but no close relative to list as the benefi -for he is considering canceling the policy because he needs the money he is currently paying 1 h ' C| Preni'ums to bu>' medical supplies. A wealthy close friend has advised Ross not to cancel C policy. I he friend has proposed instead giving Ross S360.000 to use for his medical needs u ule keeping the policy in force. In exchange, Ross would designate the friend as the policy beneficiary. Ross is reluctant to take the 5360,000 because he believes that his friend is ottering charity. His friend has tried to convince Ross that the offer is a legitimate business deal. Determine the present value of the $600,000 life insurance benefit. Assume a 10 percent discount rate. percent represents a fair rate of return, is Ross' friend offering charity or is he seeking profit financially from Ross' misfortune? Determining the present value of an annuity whether 10 install a drink machine at the gas station she owns. Molly

Explanation / Answer

A) Life expectancy of Ross = 3years

Life insurance policy =$600000

Amount offered by Ross friend today = $360000

Discount rate =10%

Present value of life insurance benefit = Amount Received after 3 years * Present value of $1due at end of 3rd year

= 600000*0.7513

   = $ 450780

B) Assuming 10% as fair rate of return Ross's friend is definately not making any charity. This deal would be more over business deal leading to profit in hands of Ross's friend as his present value of outflows is less than his present value of inflows by $90780.

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.