Scenario 15.5: Consider the Following Information Based on a Story by Hubert

question 89

Multiple Choice

Scenario 15.5:
Consider the following information based on a story by Hubert B. Herring that appeared in The New York Times on Catherine has a two-pack-a-day cigarette habit. Cigarettes cost about $2 per pack. Catherine is 20. On a $250,000 life insurance policy, her annual premiums are $1200; a non-smoker's would be $500. Smokers earn from 4 to 8 percent less in income than non-smokers (lower productivity and more absence, among other things) . In this case Catherine's income is expected to be $20,500 per year over her lifetime whereas $22,000 is an average non-smoker's salary. Let interest rates are expected to be 3%.
-Refer to Scenario 15.5. What formula shows the present value of the amount Catherine would save on cigarette purchases over her lifetime?

• A) $4 times 365 times 60
• B) $1460 (1 + 1/1.03 + 1/1.03² + 1/1.03³ + ... + 1/1.03⁶⁰)
• C) $1460 (1 + 1/1.03 + 1/1.03² + 1/1.03³ + ... + 1/1.03⁸⁰)
• D) $87,600 / (1 + 1.03 + 1.03² + ... + 1.03⁶⁰)
• E) $87,600 / (1 + 1.03 + 1.03² + ... + 1.03⁸⁰)

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Definitions:

Income Statement

A financial statement showing a company's revenues, expenses, and profits over a specified period.

Balance Sheet

A summary that encapsulates a business's liabilities, assets, and shareholders' equity at a distinct date.

Worksheet

A paper or electronic document with rows and columns, used for organizing, calculating, and presenting financial information.

Depreciation Expense

An accounting method of allocating the cost of a tangible asset over its useful life, reflecting wear and tear or obsolescence.