[reo]

NINJA Question –

I’m having trouble answering this one problem . . .

Can someone assist me please? I don’t just want the answer either, I need to know how to solve it, so that I can know this material. Any and all help would be appreciated. The problem is below, cheers(!) . . .

– – –

Julia Baker died, leaving to her husband Brent an insurance policy contract that provides

that the beneficiary (Brent) can choose any one of the following four options.

a) $119,000 immediate cash.

b) $8,000 every 3 months payable at the end of each quarter for 5 years.

c) $25,000 immediate cash and $4,000 every 3 months for 10 years, payable at the

beginning of each 3-month period.

d) $5,900 every 3 months for 3 years and $5,000 each quarter for the

following 25 quarters, all payments payable at the end of each quarter.

If money is worth 3% per quarter, compounded quarterly, which option would you

recommend that Brent exercise?

– – –

Thanks in advance! 🙂

Reo

[wombataholic]

I think the answer is C, but I could be wrong. Here's what I came up with: I used a period of 10 years (40 periods) for all options as basis for comparison, since that's the longest time period of payments among them.

A: Using the future value of 119,000 over 40 periods at 3% per period, I ended up with a total value of 388,182.50.

B: Use the future value of an ordinary annuity for 20 periods at 3%, I ended up at 214,963. Then I used the future value of that for another 20 periods and ended up at 388,247.

C: Find the future value of 25,000 for 40 periods at 3% (81,551) for the initial payment. Next use the formula for an annuity due (4,000) for 40 periods at 3% for the payments (310,653). Add them and you get 392,204.

D: Use the future value of an ordinary annuity of 5,900 for 12 periods at 3% for the first payments (83,733). Now use the future value of that amount over the next 28 periods to get to 10 years (191,575). For the second batch of payments, I used the future value of an ordinary annuity of 5,000 over 25 periods at 3% (182,296). You'll still have 3 more quarters to fill out for comparison purposes, so use the future value of 182,296 for 3 more periods (199200). Add the value of the first and second sets of payments (191,575 + 199,200) for a value of 390,775.

Of course I could be wrong.

Licensed CPA
Passed each section on the first try with Ninja Notes/MCQ/Audio

[reo]

Thank you for responding, it's appreciated. Anyone else with an opinion?

Reo

[Anonymous]

Without calculating any PV, I would choose D. The reason being is the more you delay the withdrawal of funds, the more it will earn interest.

[Author]

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