Quantcast

A community for students. Sign up today!

Here's the question you clicked on:

55 members online
  • 0 replying
  • 0 viewing

lswimstar

  • one year ago

Rehan has been awarded some money in a settlement. He has the option to take a lump sum payment of $170,000 or get paid an annuity of $1,000 per month for the next 20 years. Which is the better deal for Rehan, and by how much, assuming the growth rate of the economy is 3.05% per year?

  • This Question is Closed
  1. NitinNanda
    • one year ago
    Best Response
    You've already chosen the best response.
    Medals 0

    There are two options available: 1. Take $170,000 now: or 2. Get an annuity of $1,000 every month for 20 years which is 240 months. First annuity you will get now (time period = 0) and the last annuity you will get at the beginning of period 240 (or end of period 239). The discount rate is 3.05% per year. So the present value of all future cash flows (annuity) would be $179,956. Compairing both the options, it appears the present value of annuity is $179,956 whereas present value in case of option 1 is $ 170,000. Therefore, it can be concluded that option 2 (annuity) is better since its present value is higher.

  2. Not the answer you are looking for?
    Search for more explanations.

    • Attachments:

Ask your own question

Ask a Question
Find more explanations on OpenStudy

Your question is ready. Sign up for free to start getting answers.

spraguer (Moderator)
5 → View Detailed Profile

is replying to Can someone tell me what button the professor is hitting...

23

  • Teamwork 19 Teammate
  • Problem Solving 19 Hero
  • You have blocked this person.
  • ✔ You're a fan Checking fan status...

Thanks for being so helpful in mathematics. If you are getting quality help, make sure you spread the word about OpenStudy.

This is the testimonial you wrote.
You haven't written a testimonial for Owlfred.