1. As the beneficiary of a life insurance policy, you have two options for receiving the insurance proceeds. You can receive a lump sum of $200,000 today or receive payments of $1,400 a month for 20 years. If you can earn 6 percent on your money, which option should you take and why?
A. You should accept the payments because they are worth $209,414 to you today.
B. You should accept the payments because they are worth $247,800 to you today.
C. You should accept the payments because they are worth $336,000 to you today.
D. You should accept the $200,000 because the payments are only worth $189,311 to you today.
E. You should accept the $200,000 because the payments are only worth $195,413 to you today.
2. You are comparing two investment options that each pay 6 percent interest, compounded annually. Both options will provide you with $12,000 of income. Option A pays $2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which one of the following statements is correct given these two investment options? Assume a positive discount rate
A. Both options are of equal value since they both provide $12,000 of income.
B. Option A has the higher future value at the end of year three.
C. Option B has a higher present value at time zero.
D. Option B is a perpetuity.
E. Option A is an annuity.