You are offered a $2,400,000 retirement package to be given in $100,000 payments at the end of each of the next 24 years. You are also given the option of accepting a $1,300,000 lump sum payment now. Interest rates are at 6.4% over the next 24 years. Which is a better option?
the offered annual payments of $100,000
the lump sum of $1,300,000    
they are the same
cannot be determined

To determine the better option, we need to calculate the present value (PV) of the offered annual payments of $100,000 over 24 years, and compare it to the lump sum of $1,300,000. The present value of the annuity can be calculated using the formula for the present value of an annuity:

\[
PV = P \times \left(1 - \frac{1}{(1 + r)^n}\right) \div r
\]

Where:
- $ P $ is the annual payment ($100,000),
- $ r $ is the interest rate per period (6.4% or 0.064),
- $ n $ is the number of periods (24 years).

Let me calculate that.The present value of the 24 annual payments of $100,000, discounted at an interest rate of 6.4%, is approximately $1,209,950.

Now, comparing the two options:
- The present value of the annual payments: \$1,209,950
- The lump sum: \$1,300,000

Since the lump sum of $1,300,000 is greater than the present value of the annuity payments (\$1,209,950), the **lump sum payment** is the better option.

Would you like more details or further clarification?

Here are 5 related questions you might find helpful:
1. How would a different interest rate affect the comparison?
2. What if the payment schedule changed to semi-annual or monthly payments?
3. How is the concept of present value applied in financial planning?
4. What assumptions are made in present value calculations?
5. How can inflation impact the real value of these options?

**Tip:** Present value helps you compare cash flows received at different times by accounting for the time value of money.

You are offered a $2,400,000 retirement package to be given in $100,000 payments at the end of each of the next 24 years. You are also given the option of accepting a $1,300,000 lump sum payment now. Interest rates are at 6.4% over the next 24 years. Which is a better option?

Explore how to compare a $2,400,000 retirement package with $100,000 annual payments over 24 years and a lump sum of $1,300,000 using present value calculations. Learn how interest rates at 6.4% impact the decision and discover which option provides the better financial outcome.

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