Reference no: EM132661355

John is looking at several options to fund his son's 4-year university degree. The university fees of $45,000 a year will have be paid starting 11 years from today. He is analysing an insurance plan that pays out $45,000 a year for 4 years with the first payout 11 years from today. The insurance plan has several payment options:

Option 1

Pay $60,000 today.

Option 2

Beginning 1 year from today, pay $12,000 a year for the next 8 years.

Option 3

Beginning 1 year from today, make payments each year for the next 8 years. The first payment is $11,000 and the amount increases by 5% each year.

Answer the following questions regarding the options above:

Problem (a) Calculate the present value of each option. Use a 10% discount rate.

Problem (b) Analyse which option John should choose.

Problem (c) If the discount rate is not given to you, what would be an appropriate discount rate to use?