Question

I will Fan you, Give you a medal and write a testimony if you help me answer this question.

Answer 1

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 2

For Lump sum it's
FV
PV = ________
(1 + i)^nt

Answer 3

Annuity is


http://prntscr.com/apd6lc

Answer 4

@FaiqRaees @welshfella @sweetburger @imqwerty

Answer 5

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:
-------
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 6

I don't know if that actually helps because I already saw this exact thing word for word on Yahoo Answers....

Answer 7

@sweetburger ??

Answer 8

These are the answers so your logic doesn't match up

Lump Sum: by $91,772.64

Lump Sum: by $34,251.30

Annuity: by $91,772.64

Annuity: by $34,251.30