Answer:
The amount the company should be willing to spend now is $169,005.10.
Explanation:
This can be calculated using the formula for calculating the present value of an ordinary annuity as follows:
PV = P * ((1 - (1 / (1 + r))^n) / r) …………………………………. (1)
Where;
PV = Present value or the amount the company should be willing to spend now =?
P = Annual insurance claim = $100,000
r = Interest rate = 12%, or 0.12
n = number of years = 2
Substitute the values into equation (1) to have:
PV = $100,000 * ((1 - (1 / (1 + 0.12))^2) / 0.12)
PV = $100,000 * 1.69005102040816
PV = $169,005.10
Therefore, the amount the company should be willing to spend now is $169,005.10.
