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  • problem from asm manual

    Hello. I cannot solve the following problem as I cannot "see" what it is asking for in terms structuring properly an argument based on the formulas. Essentially I would like for someone to explain in english what is really going on, and then from this point I probably will be able to see the solution.

    Problem

    On January 1, an insurance company has 100,000 which is due to Linden as a life insurance death benefit. He chooses to recieve the benefit annually over a period of 15 years, with the first payment immediately. The benefit he receives is based on an effective interest rate of 4% per annum.

    The insurance company earns interest at an effective rate of 5% per annum. Every July 1, the company pays 100 in expenses and taxes to maintain the policy. At the end of nine years, the company has X remaining.

    Calculate X.

    Ans. Choices: a. 46000, b. 47100, c. 47,700, d. 52,800, e. 53900

    Thank you.

  • #2
    Originally posted by audia4
    Hello. I cannot solve the following problem as I cannot "see" what it is asking for in terms structuring properly an argument based on the formulas. Essentially I would like for someone to explain in english what is really going on, and then from this point I probably will be able to see the solution.

    Problem

    On January 1, an insurance company has 100,000 which is due to Linden as a life insurance death benefit. He chooses to recieve the benefit annually over a period of 15 years, with the first payment immediately. The benefit he receives is based on an effective interest rate of 4% per annum.

    The insurance company earns interest at an effective rate of 5% per annum. Every July 1, the company pays 100 in expenses and taxes to maintain the policy. At the end of nine years, the company has X remaining.

    Calculate X.

    Ans. Choices: a. 46000, b. 47100, c. 47,700, d. 52,800, e. 53900

    Thank you.
    Hey, audia. Since we need to know how much, X, is remaining after nine years, we need to find out how much the company has lost after nine years.

    Let Y be the annual benefit payment. So, after the first year, the company will have (100,000-Y) left. However, this (100,000-Y) will earn 5% interest. After the second year, the company will have (100,000-Y)*1.05 - Y left, which will earn 5% interest, etc. . .

    We need the amount of money left over after nine years, excluding the appropriate amount of expenses and tax, and that will be our X. Hope this helps, audia.

    Also, make sure the expenses are not $1,000 as opposed to $100.
    Last edited by .Godspeed.; July 25 2005, 01:58 PM.
    act justly. walk humbly. .

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