Cost of Insurance Plans
Response to the following problem:
The Johnson Company is considering three different time periods for an insurance policy on its main office building. The premiums on a fire insurance policy covering the building for the amount of $2,000,000 on a one-year, three-year, and five-year basis are as follows:
One year $ 4,480
Three years 11,200
Five years 17,920
In each case, the entire premium for the full term of the policy is payable at the beginning of the year in which the policy is purchased.
Required
Evaluate the annual cost of each insurance plan for the insured, assuming that money is worth 12% compounded annually. Which plan do you recommend? State the savings for the company.