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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.