An insurance settlement offer includes annual payments of $36,000,$42,000,and $50,000 over the next three years,respectively,with the first payment being made one year from today.What is the minimum amount you should accept today as a lump sum settlement if your discount rate is 7 percent?

Question

Quizplus · Accepted Answer

To find the minimum amount to accept today as a lump sum settlement, we need to calculate the present value of the three annual payments using the discount rate of 7 percent.

PV of Year 1 payment = $36,000 / (1 + 0.07)^1 = $33,644.86 
PV of Year 2 payment = $42,000 / (1 + 0.07)^2 = $36,164.30 
PV of Year 3 payment = $50,000 / (1 + 0.07)^3 = $40,335.02

Total PV of the payments = $33,644.86 + $36,164.30 + $40,335.02 = $110,144.18

Therefore, the minimum lump sum settlement that should be accepted today is $110,144.18. Option B is the closest answer.

An Insurance Settlement Offer Includes Annual Payments of $36,000,$42,000,and $50,000