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?© BrainMass Inc. brainmass.com June 3, 2020, 10:03 pm ad1c9bdddf
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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.
Year End Cash Flow
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.