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    Net present value of an annuity

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    You have been totally disabled and you have been offered a settlement. In addition to your lifetime medical expenses you will receive a payment of 2,500,000 today or you can receive a lifetime annuity of 150,000 a year for the rest of your life. Using a life expectancy of 82 for men and 86 for women and your age of 32, compute the net present value of the annuity if the risk free investment is 5%. Which would you choose and why?

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    You would choose the option that has the highest present value. This would mean that you are taking the option with the highest amount possible today.

    Option 1 - 2,500,000 today. The present value is the same and is ...

    Solution Summary

    The solution explains the calculation of net present value of an annuity