You just received an insurance settlement offer related to an accident you had four years ago. The offer gives you a choice of one of the following three offers:
Option A: $6,500 on the ﬁrst day of each year for 40 years
Option B: $610 on the ﬁrst day of each month for 25 years
Option C: $75,000 as a lump sum payment today
You can earn 8.75% on your investments. You do not care if you personally receive the funds or if
They are paid to your heirs should you die within the settlement period. Which one of the following
Statements is correct given this information?

Question

Quizplus · Accepted Answer

The best choice is Option A, which offers a payment of $6,500 on the first day of each year for 40 years. To determine the present value of this option, we need to use the present value formula for an annuity. Using the formula, we get:

PV = C * ((1 - (1 + r)^-n) / r)

Where PV is the present value of the annuity, C is the annual payment, r is the per-period interest rate, and n is the number of periods.

Plugging in the numbers, we get:

PV = 6,500 * ((1 - (1 + 0.0875)^-40) / 0.0875) = $140,027.05

This means that Option A has the largest present value of the three options, making it the best choice. Option C is not the best choice since while it has a large lump sum payment, it does not take into account the time value of money and the potential earnings that could be made if the funds were invested. Option B has a smaller present value than Option A, making it not the best choice.

You Just Received an Insurance Settlement Offer Related to an Accident