I don’t understand where the expenses per policy figure came from. Why is the Present value 12*(1.01)^6 when it is all in month format? So i.e. why isnt it just 12? I don’t understand the final figure of 12(1.01)^3, ultimately, when expenses are paid after 9mths (or 3 mths) after our assumed inception date, then 12*(1.01)^3 isnt the present value at time 1/07/07. but the 3mths from 1/07/07 to 1/10/07 (9months after 1/1/07 = 1/10/07).
It assumes that expenses grow by 1% a month from January, so by the time you get to a policy sold mid-year, they've already grown by 6 months. Then if you assume the expenses occur 9 months through the year, you need to discount by 3 months. As the solution says, though, the information on expenses in the question isn't entirely clear, so as long as you state what you're assuming, you should get the marks. You could easily interpret the information given slightly differently, and get a slightly different figure.
