# 307finalpart2 - Name Class Date ID A Fall 2006 BUSA307...

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Name: ________________________ Class: ___________________ Date: __________ ID: A 1 Fall 2006 BUSA307 - Final Exam Part 2 Problem 1. Sungho is married, files a joint return, and expects to be in the 35% marginal tax bracket for the foreseeable future. All of his income is from salary and all of it is used to maintain the household. He has a paid-up life insurance policy with a cash surrender value of \$50,000. He paid \$24,000 of premiums on the policy. If he retains the policy, the insurance company will pay him \$2,500 (5%) interest each year. Sungho thinks he can earn a higher return if he cashes in the policy and invests the proceeds. a. What before-tax rate of return would Sungho be required to earn on the proceeds from cashing in the policy to equal the return earned with the insurance company? b. Assume Sungho estimates he can earn an 7% before-tax rate of return on the proceeds from cashing in the policy. Assume he can earn an 7% return for the remainder of his life and that he will reinvest all earnings at the same 7% before-tax rate of return. If Sungho expects to live 10 more years, which alternative will yield the greater amount to his beneficiaries upon Sungho’s death? (Given: The future value of an annuity in 10 years assuming a 4.55% return is 12.32. The future value of an annuity in 10 years assuming a 3.25% return is 11.60).

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## This note was uploaded on 10/28/2009 for the course ECONOMY 5646 taught by Professor Korn during the Spring '09 term at Abraham Baldwin Agricultural College.

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307finalpart2 - Name Class Date ID A Fall 2006 BUSA307...

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