Ms. Ima Rich has just passed away. In her will she has left your not-for-profit organization $2 million dollars to be paid out in annual installments of $100,000 a year for the next twenty years.
The executive director of your organization wants the money now to purchase a new headquarters. You have been charged with finding a way to get the money sooner. You have contacted Farmers Insurance Company and they have agreed to advance $1.3 million in return for the annuity from Ima.
Your boss doesn't understand why they won't give you the full $2. How do you explain this to her? Are you getting a good deal from the insurance company? How can you tell?
They will not give you the full $2M because of time value of money. A dollar received right now is more valuable than a dollar received a year from now. This underlying concept explains why they will not give the entire $2M upfront. To Farmer's Insurance an annuity that gives 100,000 ...
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