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You just settled an insurance claim that calls for increasing payments over a 10-year period. The first payment will be paid one year from now in the amount of $5,000. The following payments will increase by 3.5 percent annually. What is the value of this settlement to you today if you can earn 6.5 percent on your investments?
a. $42,023.05.
b. $36,408.28.
c. $34,141.14.
d. $41,422.89.
e. $38,008.16.
f. $38,008.16.

Respuesta :

Karabo99

Answer:

d. $41,422.89.

Explanation:

it is important to note that, Value of claim = PV of cash flows from it

year     cash flow      PV@ 6.5%            Disc CF

1            $5,000          0.9390               $4694.84

2           $5175             0.8817                $4562.59

3           $5356.13        0.8278               $4434.06

4           $5543.56       0.7773                $4309.16

5           $5737.62        0.7299               $4187.78

6           $5938.43        0.6853               $4069.81

7           $6146.28         0.6453               $3955.17

8           $6361.40         0.6042               $3843.75

9           $6584.05        0.5674                $3735.48

10          $6814.49         0.5327                $3530.25

value of insurance claim                          $41422.89

Therefore, The value of this settlement to you today if you can earn 6.5 percent on your investments is $41,422.89

Answer: D

Explanation:

PV = initial payment × [1-(1+g/1+r)^]/r-g

PV =$5000×[1-(1+0.035/1+0.065)^10/0.65-0.35

PV =$500×0.2485373145/0.03

PV=$5000×8.28457715

PV=41,422.89

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