Question

Sally brings home $50,000 a year to help provide financial support to her family, comprised of her husband and two children. She is considering purchasing life insurance. Using the earnings multiple approach, how much coverage should she purchase using a discount rate of 5% to replace 10 years of earnings.

Answer 1

Answer:

$386,080

Explanation:

In order to find the Coverage of sally's investment in life insurance for 10year can be done by making 10-year table

Year     Cashflow    Discount factorI5%)    Present Value

                 $                       $                                  $

1           50,000              0.9524                        47,620

2           50,000              0.9070                       45,350

3           50,000              0.8638                        43,190

4           50,000              0.8337                        41,135

5           50,000              0.7835                        39,175

6           50,000              0.7462                        37,310

7           50,000              0.7107                         35,535

8           50,000              0.6768                        33,840

9           50,000              0.6446                        32,230

10          50,000              0.6139                        30,695

NPV =  Sum of all present values

NPV = $386,080