An Annuity Due as the Present Value of an Immediate Cash Flow Plus an Ordinary Annuity
You are retiring today and must choose to take your retirement benefits either as a lump sum or as an annuity.
Your company’s benefits officer presents you with two alternatives: an immediate lump sum of $2 million or
an annuity with 20 payments of $200,000 a year with the first payment starting today. The interest rate at your
bank is 7 percent per year compounded annually. Which option has the greater present value? (Ignore any tax
differences between the two options.)
I am not sure why PV came as = 2, 067.119.05
from calc- BGN mode -> 200000 PMT , 20 N, 7 I/Y CPT PV..this doesnt give us answer 2, 067.119.05
PMT :- 2,00,000
N :-20
I/Y :- 7%
CPT PV :- -21,18,802
AND HERE WE WILL NEGLECT (-) SIGN
SO CLEARLY WE CAN SEE THAT ALTERNATIVE 2 GIVES MORE BENEFIT
Hi Takshil, 2nd alternative is correct. But my question was not that. My question was we get 2118802 as PV. But in the book the answer to pv is 2067119. How did we get that from calc?
oh I GOT IT we have done the first installment so
no. of years left will be 20-1 =19
SO, HERE IS THE SOLUTION
PMT :- 200000
N:-19
I/Y :- 7%
CPT PV :- -2067119.59
But there are 20 paymenst why are we neglecting 1st installment
because he has done that first installment in the starting and we know that we does not count the starting installments in any question