Question

Ralph has been awarded some money in a settlement. He has the option to take a lump sum payment of $425,000 or get paid an annuity of $2,000 per month for the next 25 years. Which is the better deal for Ralph, and by how much, assuming the growth rate of the economy is 5.15% per year?

Lump Sum: by $91,772.64

Lump Sum: by $34,251.30

Annuity: by $91,772.64

Annuity: by $34,251.30

Answer 1

@knov

Answer 2

@marcelie @Allieeslabae ?

Answer 3

@ParthKohli

Answer 4

present value of the annuity
PV = PMT(1- (1+r)^-n)/r with r & n adjusted for periodicity
= 2000(1- (1+5.15/1200)^-300)/(5.15/1200) = $337,062

take the lump sum
its PV is better by (425000 - 337062) = $87,938 <------

note:
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it has been assumed that payments are at the end of each month, ie start 1 month after winning the prize. if they start immediately, the PV of the annuity will be $338,509 and the benefit of lump sum will be $86,491

Answer 5

does that help???

Answer 6

I don't think that's one of the answers.

Answer 7

@ganeshie8 :(

Answer 8

@FaiqRaees

Answer 9

@logan13 ??