The Theory Behind Time Value of Money
Discuss about the Importance Of Time Value Of Money In Financial Management Decision Making.
- Concept of time value of money (TVM)
The concept of time value is an economics concept also widely used in the discipline of Financial Management for the purpose of decision making. The theory behind the TVM is used to find out the future value of the money in present time period. In other words, TVM is about finding the worth of a sum of money in present date as its equivalent in future dates considering the effects of interest, inflation and other factors on the money if it is kept until that future date. The assumption behind this concept is that, due to the potential earning capacity a sum of money is worth more in the present than in the future.
TVM is also called as the discounted value of the money or the Net Present Value (NPV). As a matter of fact a rational investor would want to receive a sum of money in the present date as compared to a future date because the sooner the money is received the more value it gives. It gives quantitative value to an assumption or plan which makes it easy to make decisions.The five variables that are used for the TVM are;
- Present value(PV) or the amount in hand
- Future value or the equivalent of the PV in future
- Time period or number of periods money is to be held
- Interest rate or the discounting rate
- Payment or installments (Woodruff 2018)
The formula for calculating the TVM based in the above variables is;
FV = PV x [ 1 + (i / n) ] (n x t)
- Discounting VS Compounding process
- Discounting:
Discounting is the indirect assessment of the present value of a sum of money to be received in future. It can also be used to assess the amount to be invested in present so as to receive certain amount at a later date. The concept is futuristic and helps to make decisions for future by determining the value of sum receivable or current value of sum to be invested (Keythman 2015)
A denomination of money is worth more as of today than at a specified future date or even tomorrow. Discounting helps in ascertaining the worth of future cash flows in the present date and gives a clear idea whether or not the target is going to be achieved. Another use of the process of discounting is that it helps in the valuation of financial assets. For example, the current value of a bond is the present value and the value of the same bond in some future date is the future value. The net present value is determined by finding out the difference between the two values using a discounting rate.
- Compounding:
The Five Variables Used in TVM
Process of compounding presents a stark contrast to the process of discounting. This is a direct concept of the time value of money. It helps in determining the future value of the current investment i.e. to say the potential amount that will be received in a future date if we invest today. Also it can be used for the purpose of calculating the payments to be made at a future date for an existing loan or a loan to be taken.
Unlike discounting here we know the present value of money and the future value is to be ascertained. Compounding occurs when the earnings to an asset in the form of interest or capital gains are invested again. The result will be additional earnings in the form of compound interest on the reinvested amount and the original amount.
- Discounting over compounding:
Discounting is the most favored process in the concept of TVM for the purpose of financial decision making because it gives an overview on the current value of money considering all the factors that can come to play in future. It is a comprehensive method of calculating the worth of an asset which considers the inflation, interest rates, depreciation for depreciable assets and taxes. It provides better insights into the present so as to make informed decisions for the future (Sanders 2017)It is wise to use discounting in place of compounding since decisions are made as per the targets to be achieved and the target in the form of future value is known in the discounting process and the current course of action can be decided in the form of a present value (Surbhi 2015)
- Discount rate and its components
The discount rate is the rate of return used to calculate the present value of the future cash flows in the discounted cash flow analysis. The rate of discounting considers two elements for calculation of an appropriate discount rate; one is the risk free rate and the other being the risk premium. Risk free rate means the receipt that has no chance of default like the rate of return in the government securities. So to construct a suitable rate for discounting, risk free rate is often extracted from the rate of return of the government securities (Dalfard 2016) The risk premium, however, is the risk that the business is exposed to during its operation. The risk factor could differ as per the instrument of investment as it is mentioned earlier that each investment has a unique risk element attached to it. While calculating the premium inflation is often considered as a part of risk. The risk premium is calculated upon consideration of the following factors
- Size of the company
- Industry specific risk element
- Inflation attribute
- Company specific risk element.
Discounting and its Importance
The formula for calculating the discount rate is:
- Use of different rates for different investment decisions:
It is important to use different rates for different investments because every investment is exposed to unique risk factor(s) and they will have different returns. For a specific investment the risk and return associated with that particular investment must be considered to make the correct decisions otherwise if an incorrect rate is used the decisions will automatically be incorrect. For example, an equity investment must consider the risk premium of the company and industry from which the equity is to be bought and the rate meant for any other company cannot be used to make an informed decision. One decision affects the series of operations and other decisions as well, so for everything to fall in a line it is important to use the relevant discount rate.
- TVM in valuation of financial instruments
Financial instruments such as bonds, equity and preference shares are the most common forms of investment. To find the worth of each financial instrument and deciding the most beneficial course of action before investing into any of them the concept of TVM is very helpful. This is in reference to a household investor (Larson 2015)
The valuation of an instrument is a very crucial decision for any company. TVM can help find the valuation or pricing to be fixed for the instrument in question. The pricing is decided based on the factors like taxes, interest, scrap value, repairs and other cash flows. Financial instruments are carried at fair value and the fair value is nothing else but the time value of the investment on the financial instrument. The yield of an instrument is calculated based on the market scenario and assumptions for the future and that yield is then used to calculate the present value.
- Capital budgeting decisions and TVM
TVM can help in finding out whether an investment will yield positive or negative result. The concept is technical but worth the complication and it can be done in the spreadsheet. The business unit wishes to forecast the viability of an investment in a project, expansion or buying an asset. An investment made now will fetch returns after a few years. Time value concept will accurately tell the worth of the investment in terms of the present value for helping the business unit decide on whether or not to invest in the project. For making capital budgeting decisions the company calculates the cash flows in the form of inflows and the outflows. Then the net cash flow is discounted to estimate the current worth of a future project in the form of the net present value thus found. It can be represented in a formula as under (Merittt 2015)
Process of Compounding
NPV = C x {(1 – (1 + R)-T) / R} − Initial Investment (Freedman 2018)
- Other issues in TVM
The following are the issues when it comes to the use of TVM in financial management decision making:
- The method of finding the present value involves technicality and expertise. It is in itself a process to be learned to be applied.
- Identifying the correct future cash flows of a project and the timing factor involved to earn the return is complicated (Dalfard 2016)
- There are always a minimum of four variables to be ascertained and the variables keep changing as per the current and the future market scenario.
- The normal human mind works as per the growth model but the TVM is based on the regressive model of discounting which is just the opposite of human psychology.
Studebaker seems to be looking on following financial goals:-
Diversification
Buy and hold
Diversification is a technique of investment in such a way your investment do not directly associate with market ups and down, that simply means to not to put all eggs in one basket, so that if you invest in only one company or one kind of investment and if such company falls then in such case value of entire investment will also fall down, diversification allows to keep portfolio in a less risky position. Diversification is a evolution strategy that exploits on market chances by dealing outlay risk over dissimilar asset modules. Diversification tells for spreading the selection among unlike assets which also includes stocks, bonds, real land, international hoards, and cash equals. Through modification the investment will be able to comprimise on the losses on the profits.
Buy and hold policy is opted to get good returns in long run instead of involving in day to day speculation, in buy and hold policy one need to properly check about ways to investment before investing and less attention is required in buy and hold policy.
In our opinion policy opted by Studebaker are beneficial for him and both are correct goal.It will help in future
In Life Insurance Policy the Sum Invested will keep on Increasing every year with 6% return and that return will increase the amount of investment in the beginning of each year, hence Life Insurance Policy Sum can be calculated as follows:-
Year |
Life Insurance Policy Value at Opening of the year (Figures in $) |
Return earned at the rate of 6% during the year (Figures in $) |
Life Insurance Policy Value at Closing of the year (Figures in $) |
1 |
550,000 |
33,000 |
583,000 |
2 |
583,000 |
34,980 |
617,980 |
3 |
617,980 |
37,079 |
655,059 |
4 |
655,059 |
39,304 |
694,362 |
5 |
694,362 |
41,662 |
736,024 |
6 |
736,024 |
44,161 |
780,186 |
7 |
780,186 |
46,811 |
826,997 |
8 |
826,997 |
49,620 |
876,616 |
9 |
876,616 |
52,597 |
929,213 |
10 |
929,213 |
55,753 |
984,966 |
11 |
984,966 |
59,098 |
1,044,064 |
12 |
1,044,064 |
62,644 |
1,106,708 |
13 |
1,106,708 |
66,402 |
1,173,111 |
14 |
1,173,111 |
70,387 |
1,243,497 |
15 |
1,243,497 |
74,610 |
1,318,107 |
16 |
1,318,107 |
79,086 |
1,397,193 |
17 |
1,397,193 |
83,832 |
1,481,025 |
18 |
1,481,025 |
88,862 |
1,569,887 |
19 |
1,569,887 |
94,193 |
1,664,080 |
20 |
1,664,080 |
99,845 |
1,763,925 |
As calculated above, Morton has worked out in same way.
In order to reposition the equity in his home, Studebaker would have to take out a 30-
year, $705,000 mortgage at 9 percent. Explain how the yearly mortgage payments on
this loan were obtained. If the loan is for only 20 years, what would be the annual
repayment?
For calculating Installment following Formula is used
Installment = [P * r * ( 1 + r )^N] / [ ( 1 + r )^N – 1 ]
Installment = [450000 * 0.09 * ( 1 + 0.09 )^20] / [ ( 1 + 0.09 )^20 – 1 ]
By Solving above equation Installment Comes to $77230.26.
Year |
Opening Balance (Figures in $) |
Installment (Figures in $) |
Interest Payment (Figures in $) |
Principle Repayment (Figures in $) |
Closing Balance (Figures in $) |
1 |
705000.00 |
77230.26 |
63450.00 |
13780.26 |
691219.74 |
2 |
691219.74 |
77230.26 |
62209.78 |
15020.48 |
676199.26 |
3 |
676199.26 |
77230.26 |
60857.93 |
16372.33 |
659826.93 |
4 |
659826.93 |
77230.26 |
59384.42 |
17845.84 |
641981.09 |
5 |
641981.09 |
77230.26 |
57778.30 |
19451.96 |
622529.13 |
6 |
622529.13 |
77230.26 |
56027.62 |
21202.64 |
601326.49 |
7 |
601326.49 |
77230.26 |
54119.38 |
23110.88 |
578215.62 |
8 |
578215.62 |
77230.26 |
52039.41 |
25190.85 |
553024.76 |
9 |
553024.76 |
77230.26 |
49772.23 |
27458.03 |
525566.73 |
10 |
525566.73 |
77230.26 |
47301.01 |
29929.25 |
495637.48 |
11 |
495637.48 |
77230.26 |
44607.37 |
32622.89 |
463014.59 |
12 |
463014.59 |
77230.26 |
41671.31 |
35558.95 |
427455.64 |
13 |
427455.64 |
77230.26 |
38471.01 |
38759.25 |
388696.39 |
14 |
388696.39 |
77230.26 |
34982.68 |
42247.58 |
346448.81 |
15 |
346448.81 |
77230.26 |
31180.39 |
46049.87 |
300398.94 |
16 |
300398.94 |
77230.26 |
27035.90 |
50194.36 |
250204.59 |
17 |
250204.59 |
77230.26 |
22518.41 |
54711.85 |
195492.74 |
18 |
195492.74 |
77230.26 |
17594.35 |
59635.91 |
135856.82 |
19 |
135856.82 |
77230.26 |
12227.11 |
65003.15 |
70853.68 |
20 |
70853.68 |
77230.26 |
6376.83 |
70853.43 |
0.25 |
For the 9 percent mortgage in Exhibit 4, find the loan balance at the end of years 19
Why use Discounting Over Compounding
and 20?
Balance at the end of year 19 would be $466986.66 and at the end of year 20 would be $440393.33, which is calculated as follows :-
Amortization of Studenbaker’s 705000 /- 9 % Mortgage, 30 Years loan |
|||||
End of Year |
Opening Balance (Figures in $) |
Installment (Figures in $) |
Interest Payment (Figures in $) |
Principle Repayment (Figures in $) |
Closing Balance (Figures in $) |
1 |
705000.00 |
68622 |
63450.00 |
5172.13 |
699827.87 |
2 |
699827.87 |
68622 |
62984.51 |
5637.62 |
694190.25 |
3 |
694190.25 |
68622 |
62477.12 |
6145.00 |
688045.25 |
4 |
688045.25 |
68622 |
61924.07 |
6698.06 |
681347.19 |
5 |
681347.19 |
68622 |
61321.25 |
7300.88 |
674046.31 |
6 |
674046.31 |
68622 |
60664.17 |
7957.96 |
666088.35 |
7 |
666088.35 |
68622 |
59947.95 |
8674.18 |
657414.18 |
8 |
657414.18 |
68622 |
59167.28 |
9454.85 |
647959.33 |
9 |
647959.33 |
68622 |
58316.34 |
10305.79 |
637653.54 |
10 |
637653.54 |
68622 |
57388.82 |
11233.31 |
626420.23 |
11 |
626420.23 |
68622 |
56377.82 |
12244.31 |
614175.92 |
12 |
614175.92 |
68622 |
55275.83 |
13346.29 |
600829.63 |
13 |
600829.63 |
68622 |
54074.67 |
14547.46 |
586282.16 |
14 |
586282.16 |
68622 |
52765.39 |
15856.73 |
570425.43 |
15 |
570425.43 |
68622 |
51338.29 |
17283.84 |
553141.59 |
16 |
553141.59 |
68622 |
49782.74 |
18839.38 |
534302.21 |
17 |
534302.21 |
68622 |
48087.20 |
20534.93 |
513767.28 |
18 |
513767.28 |
68622 |
46239.06 |
22383.07 |
491384.21 |
19 |
491384.21 |
68622 |
44224.58 |
24397.55 |
466986.66 |
20 |
466986.66 |
68622 |
42028.80 |
26593.33 |
440393.33 |
Exhibit 3 indicates that $1,763,925 will be accumulated after 20 years in the life
insurance policy. Is this really true? (Hint: If Studebaker were to make this investment, what would his debt position look like in year 20?)
Yes, it is true, life insurance policy will be accumulated after 20 years to $1,763,925/- as indicated in Exhibit 3, and as calculated in Answer of Question 1, however if Studebaker will opt the suggestion of Morton, Studebaker will have to take loan further for $250000/-, and that amount mortgage Loan will be repaid till the end of 30 years and balance of loan at the time of maturity of LIC (i.e. at the end of 20 years) would be $440393.33/-.
(A) If the excess $300,000 were invested in a long-term asset yielding 8 percent a year,how much would be accumulated after 20 years?
Answer :- $1,398,287, will be accumulated after 20 Years, Calculation is as follows:-
End of Year |
Long Term Assets Value at Opening of the year (Figures in $) |
Return earned at the rate of 8% during the year (Figures in $) |
Long Term Assets Value at Closing of the year (Figures in $) |
1 |
300,000 |
24,000 |
324,000 |
2 |
324,000 |
25,920 |
349,920 |
3 |
349,920 |
27,994 |
377,914 |
4 |
377,914 |
30,233 |
408,147 |
5 |
408,147 |
32,652 |
440,798 |
6 |
440,798 |
35,264 |
476,062 |
7 |
476,062 |
38,085 |
514,147 |
8 |
514,147 |
41,132 |
555,279 |
9 |
555,279 |
44,422 |
599,701 |
10 |
599,701 |
47,976 |
647,677 |
11 |
647,677 |
51,814 |
699,492 |
12 |
699,492 |
55,959 |
755,451 |
13 |
755,451 |
60,436 |
815,887 |
14 |
815,887 |
65,271 |
881,158 |
15 |
881,158 |
70,493 |
951,651 |
16 |
951,651 |
76,132 |
1,027,783 |
17 |
1,027,783 |
82,223 |
1,110,005 |
18 |
1,110,005 |
88,800 |
1,198,806 |
19 |
1,198,806 |
95,904 |
1,294,710 |
20 |
1,294,710 |
103,577 |
1,398,287 |
(B) Suppose Studebaker placed $26,145.31 a year into a long-term investment paying 8
percent a year. How much would be accumulated after 20 years (amounts invested
at the end of each year)?
$1,292,178/- will be accumulated after 20 Years, if Studebaker Invests $26145.31/- every year together will earlier Investment, Calculation is as follows:-
End of Year |
Long Term Assets Value at Opening of the year (Figures in $) |
Return earned at the rate of 8% during the year (Figures in $) |
Long Term Assets Value at Closing of the year (Figures in $) |
1 |
26,145 |
2,092 |
28,237 |
2 |
54,382 |
4,351 |
58,733 |
3 |
84,878 |
6,790 |
91,668 |
4 |
117,814 |
9,425 |
127,239 |
5 |
153,384 |
12,271 |
165,655 |
6 |
191,800 |
15,344 |
207,144 |
7 |
233,289 |
18,663 |
251,953 |
8 |
278,098 |
22,248 |
300,346 |
9 |
326,491 |
26,119 |
352,610 |
10 |
378,756 |
30,300 |
409,056 |
11 |
435,201 |
34,816 |
470,018 |
12 |
496,163 |
39,693 |
535,856 |
13 |
562,001 |
44,960 |
606,961 |
14 |
633,107 |
50,649 |
683,755 |
15 |
709,900 |
56,792 |
766,692 |
16 |
792,838 |
63,427 |
856,265 |
17 |
882,410 |
70,593 |
953,003 |
18 |
979,148 |
78,332 |
1,057,480 |
19 |
1,083,625 |
86,690 |
1,170,315 |
20 |
1,196,461 |
95,717 |
1,292,178 |
Repeat problem 5 but assume a 7 percent return can be earned ?
Life insurance policy will be accumulated after 20 years to $21,28,326/- as indicated in Exhibit 3 and f rate of return is 7% instead of 6%, however if Studebaker will opt the suggestion of Morton, Studebaker will have to take loan further for $2,50,000/-, and that amount mortgage Loan will be repaid till the end of 30 years and balance of loan at the time of maturity of LIC (i.e. at the end of 20 years) would be $4,40,393.33/-.
Comer’s criticisms implied that the single-premium life insurance policy is an
unattractive investment for Studebaker. What do your previous answers suggest?
Yes Comer’s criticisms is correct that single investment policy is not an attractive investment for Studebaker as mentioned below:-
If Studebaker would have opted the Morton’s way of investment then in such case at the end of 20 years Studebaker would have to $1,763,925/-, with the increase in Loan Installment of $26145.31/- every year and loan balance of $440393.33/-, at the end of 20 years, accumulated balance of LIC according to increased return @ 7% would be $21,28,326/-
Calculation of the Discount Rate
And If with the same resources Studebaker would have invested $300,000 in a long-term asset yielding 8 percent for 20 years then accumulated balance in hands of Studebaker would be $1,398,287/- and if $26145.31/- would have been invested every year together with earlier invested sum at the rate of 8%, accumulated balance at the end of 20 years would be $1,292,178/-, if we take total of both of these Investments total accumulated with same resources would have been $26,90,465/-, due to increase in rate of return, the accumulated balance of these investments are more than the Morton’s suggestions by $9,26,540/-.
(26,90,465/- – 17,63,925/-).
Requirement at the end of 20 years |
$3,500,000.00 |
||
Amount will be received out of the investment of $300000 at the end of 20 years as calculated in 6 (a) |
$1,398,287.14 |
||
Balance Amount required at the end of 30 years |
$2,101,712.86 |
||
End of Year |
Long Term Assets Value at Opening of the year (Figures in $) |
Return earned at the rateof 8% during the year (Figures in $) |
Long Term Assets Value at Closing of the year (Figures in $) |
1 |
42,525.05 |
3,402.00 |
45,927.05 |
2 |
88,452.10 |
7,076.17 |
95,528.27 |
3 |
138,053.32 |
11,044.27 |
149,097.59 |
4 |
191,622.64 |
15,329.81 |
206,952.45 |
5 |
249,477.50 |
19,958.20 |
269,435.70 |
6 |
311,960.75 |
24,956.86 |
336,917.61 |
7 |
379,442.66 |
30,355.41 |
409,798.07 |
8 |
452,323.12 |
36,185.85 |
488,508.97 |
9 |
531,034.02 |
42,482.72 |
573,516.74 |
10 |
616,041.79 |
49,283.34 |
665,325.14 |
11 |
707,850.19 |
56,628.01 |
764,478.20 |
12 |
807,003.25 |
64,560.26 |
871,563.51 |
13 |
914,088.56 |
73,127.08 |
987,215.65 |
14 |
1,029,740.70 |
82,379.26 |
1,112,119.95 |
15 |
1,154,645.00 |
92,371.60 |
1,247,016.60 |
16 |
1,289,541.65 |
103,163.33 |
1,392,704.98 |
17 |
1,435,230.03 |
114,818.40 |
1,550,048.44 |
18 |
1,592,573.49 |
127,405.88 |
1,719,979.37 |
19 |
1,762,504.42 |
141,000.35 |
1,903,504.77 |
20 |
1,946,029.82 |
155,682.39 |
2,101,712.21 |
Hence $2101712/- will be received after 20 years by investing $42525.05/- every year.
Requirement at the end of 20 years |
$3,500,000.00 |
|
Amount will be received out of the investment of $300000 at the end of 20 years as calculated in 6 (a) |
$1,398,287.14 |
|
Balance Amount required at the end of 30 years |
$2,101,712.86 |
End of Year |
Long Term Assets Value at Opening of the year (Figures in $) |
Return earned at the rateof 8% during the year (Figures in $) |
Long Term Assets Value at Closing of the year (Figures in $) |
1 |
55,402.45 |
4,432.20 |
59,834.65 |
2 |
115,237.10 |
9,218.97 |
124,456.06 |
3 |
179,858.51 |
14,388.68 |
194,247.19 |
4 |
249,649.64 |
19,971.97 |
269,621.62 |
5 |
325,024.07 |
26,001.93 |
351,025.99 |
6 |
406,428.44 |
32,514.28 |
438,942.72 |
7 |
494,345.17 |
39,547.61 |
533,892.78 |
8 |
589,295.23 |
47,143.62 |
636,438.85 |
9 |
691,841.30 |
55,347.30 |
747,188.60 |
10 |
802,591.05 |
64,207.28 |
866,798.34 |
11 |
922,200.79 |
73,776.06 |
995,976.85 |
12 |
1,051,379.30 |
84,110.34 |
1,135,489.64 |
13 |
1,135,489.64 |
90,839.17 |
1,226,328.82 |
14 |
1,226,328.82 |
98,106.31 |
1,324,435.12 |
15 |
1,324,435.12 |
105,954.81 |
1,430,389.93 |
16 |
1,430,389.93 |
114,431.19 |
1,544,821.12 |
17 |
1,544,821.12 |
123,585.69 |
1,668,406.81 |
18 |
1,668,406.81 |
133,472.55 |
1,801,879.36 |
19 |
1,801,879.36 |
144,150.35 |
1,946,029.71 |
20 |
1,946,029.71 |
155,682.38 |
2,101,712.09 |
If Investment can be made only up to the end of 12 years in such case he has to invest $55402.45/- to receive $2101712/- at the end of 20 years.
$5,672.59/- will required to paid on monthly basis till 20 years for repayment of loan of $705,000/- which means yearly payment will be ($5,672.59/- * 12) $68,071.08/-, however if we go for yearly installment basis then installment amount was $68,622/-
In case of Monthly payment system total of yearly installments is less in comparison with yearly payment system, reason behind is that in Monthly installment System interest is charged on less principal amount as payment is being made monthly and principal part is reducing monthly, and in case of yearly payment system, installment is paid at the end of the year and interest is charged on comparative large amount of principle (Wiley 2018).
Corner’s has calculated cost of $47,145.31/- for the first year, by taking total of interest of $21000/- on $3,00,000/- @ 7% interest and $26145.31/- as increased installment amount.
For 20th year Corner has calculated $1,70,502.31/- as extra annual cost by taking total of following :-
Increase Installment amount of loan $26,145.31/-
Interest lost on $300000 in 20th year $75,947/-
Interest lost on $26145.31 and its cumulative Investment in 20 years $68,410/-
End of Year |
Long Term Assets Value at Opening of the year (Figures in $) |
Return earned at the rate of 7% during the year (Figures in $) |
Long Term Assets Value at Closing of the year (Figures in $) |
Long Term Assets Value at Opening of the year (Figures in $) |
Return earned at the rate of 7% during the year (Figures in $) |
Long Term Assets Value at Closing of the year (Figures in $) |
Total Cost of the year |
1 |
300,000 |
21,000 |
321,000 |
26,145 |
1,830 |
27,975 |
47,145 |
Continued Calculation |
|||||||
18 |
947,645 |
66,335 |
1,013,980 |
888,915 |
62,224 |
951,139 |
148,923 |
19 |
1,013,980 |
70,979 |
1,084,958 |
977,285 |
68,410 |
1,045,695 |
159,348 |
20 |
1,084,958 |
75,947 |
1,160,905 |
1,071,840 |
75,029 |
1,146,869 |
170,502 |
Policy suggested by morton do not consider the opportunity cost of the amount required to be invested in life insurance policy, return in life insurance policy is 6% and return in other investment of markets are 7-8% per annum, hence in our opinion Morton’s policy do have various mistakes and do not provide most appropriate benefit. (James 2015)
In our Critical Evaluation we found that investment of funds in outside assets which are yielding 8% return per annum is better instead of life insurance policy, further it is not an good option to take loan at 9% rate of interest and invest that funds at 6% interest rate or an interest rate less than 9%, hence option given by Morton is not correct and in our opinion and only 300000 shall be invested in appropriate manner.
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