Reference no: EM131962659

1. As the beneficiary of a life insurance policy, you have two options for receiving the insurance proceeds. You can receive a lump sum of $200,000 today or receive payments of $1,400 a month for 20 years. If you can earn 6 percent on your money, which option should you take and why?

A. You should accept the payments because they are worth $209,414 to you today.

B. You should accept the payments because they are worth $247,800 to you today.

C. You should accept the payments because they are worth $336,000 to you today.

D. You should accept the $200,000 because the payments are only worth $189,311 to you today.

E. You should accept the $200,000 because the payments are only worth $195,413 to you today.

2. You are comparing two investment options that each pay 6 percent interest, compounded annually. Both options will provide you with $12,000 of income. Option A pays $2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which one of the following statements is correct given these two investment options? Assume a positive discount rate

A. Both options are of equal value since they both provide $12,000 of income.

B. Option A has the higher future value at the end of year three.

C. Option B has a higher present value at time zero.

D. Option B is a perpetuity.

E. Option A is an annuity.