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20 pts please help!


Randy has been awarded some money in a settlement. He has the option to take a lump sum payment of $300,000 or get paid an annuity of $2,000 per month for the next 20 years. Which is the better deal for Randy, and by how much, assuming the growth rate of the economy is 5.65% per year?


(A) Lump Sum: by $23,606.12

(B) Lump Sum: by $16,726.56

(C) Annuity: by $23,606.12

(D) Annuity: by $16,726.56

Respuesta :

Did you get an answer? I thought it was lump sum, but i don't know which option

Answer  - B

Formula to calculate present value of annuity:

PV = P( 1 - ( 1+r)^(-n) )/r

PV- present value,  P- payment,  r- periodic interest rate, n - number of periods

On putting the values,

PV = 2000( 1 - ( 1 + (5.65/1200)^(-240) ) / (5.65/1200)

PV = 283273.44


Lump sum - PV = 300000 - 283273.44 = 16726.56

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