Answer:
The present value of Annuity is 102,228 which is higher than that of Annuity B - $95,312 Hence, Annuity is preferable.
Explanation:
To determine which to go for, we would calculate the present value of insurance investment discounted at the at the rate of 7%.
The PV of the insurance annuities would be done as follows:
PV of annuity A
The number of payments would be 20 installments. Please be mindful not to say 19. Remember the first the payment occurs in year 4 which is inclusive.
PV = A + A × 1- ( (1+r)^(-n))/r
A- annual payment
r- rate of return
n- number of years
PV = 16,000 + 16,000 × (1- 1.07^(-7) )/0.07 = $102,228.63
PV of annuity B
PV = 12,000× (1-1.07^(-12)/0.07) = $95,312.24
The present value of Annuity is 102,228 which is higher than that of Annuity B - $95,312 Hence, Annuity is preferable.
