Textbook Problem

Cost of Insurance Plans

Johnson Company is considering three different time periods for an insurance policy on its main office building. The premiums on a fire insurance policy covering the building for the amount of $2,000,000 on a 1-year, 3-year, and 5-year basis are as follows:

In each case, the entire premium for the full term of the policy is payable at the beginning of the year in which the policy is purchased.

Required:

Evaluate the present value of the annual cost of each insurance plan assuming a 12% compounded annual discount rate. Which plan do you recommend? State the savings for the company.