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    Time value of money

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    Sam was injured in an accident, and the insurance company has offered him the choice of $49,000 per year for 15 years, with the first payment being made today, or a lump sum. If a fair return is 7.5%, how large must the lump sum be to leave him as well off financially as with the annuity?

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    The lump sum should be the present value of annuity. In this case both the annuity and the lumpsum would be the same and so Sam would be financially as well off.
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    Solution Summary

    The solution explains how to determine the amount of lump sum.