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Comparing lump sum payment and life time annuity

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Upon retirement, you are offered a choice between a $250,000 lump sum payment or a lifetime annuity of $51,200. If you expect to live for 15 years after retirement, at what required rate of return would you be indifferent between the two alternatives?

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Solution Summary

Solution describes the steps needed for comparing two alternatives of a lump sum payment and life time annuity. It determines at what rate of return a person can be indifferent to both alternatives.

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Please refer attached solution for better clarity of formulas and tables.

Solution:

Lump sum payment is $250,000.
I will be indifferent for both choices if PV of annuity for 15 years is same as Lump sum payment.

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Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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