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

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 life insurance premiums over her lifetime by stopping smoking?

A) $700 times 60
B) $700 (1 + 1/1.03 + 1/1.03² + 1/1.03³ + ... + 1/1.03⁶⁰)
C) $700 (1 + 1/1.03 + 1/1.03² + 1/1.03³ + ... + 1/1.03⁸⁰)
D) $42,000 / (1 + 1.03 + 1.03² + ... + 1.03⁶⁰)
E) $42,000 / (1 + 1.03 + 1.03² + ... + 1.03⁸⁰)