Explore BrainMass

Explore BrainMass

    Comparing lump sum payment and life time annuity

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    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
    https://brainmass.com/business/annuity/comparing-lump-sum-payment-life-time-annuity-212996

    Solution Preview

    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.

    Year End Cash Flow
    0 ...

    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.

    $2.19

    ADVERTISEMENT