Exerc a lump-sum future cash receipt Neil Wooten has a terminal illness. His doc

Question

Exerc a lump-sum future cash receipt Neil Wooten has a terminal illness. His doctors have estimated his remaining life expectancy as three years. Neil has a $450,000 life insurance policy but no close relative to list as the beneficiary. He is considering canceling the policy because he needs the money he is currently paying for the premiums to buy medical supplies. A wealthy close friend has advised Neil not to cancel the policy. The friend has proposed instead giving Neil $270,000 to use for his medical needs while keeping the policy in force. In exchange, Neil would designate the friend as the policy beneficiary. Neil is reluctant to take the $270,000 because he believes that his friend is offering charity. His friend has tried to convince Neil that the offer is a legitimate business deal. ise 10-38 Determining the present value of LO 10 Required a. Determine the present value of the $450,000 life insurance benefit. Assume a 10 percent discount rate. Assuming 10 percent represents a fair rate of return, is Neil's friend offering charity or is he seek- ing to profit financially from Neil's misfortune? b.

Explanation / Answer

Part - A

Present Value 450000 .life insurance benefit Calculation

Present Value = 450,000*0.7513 (10%, for 3rd Prsent Value Factors )

=338,505

Part -B

Neil's Friend offering only for Profit because Present Value is 338085 instead of 270000

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