Question

As a settlement for an insurance claim, Craig was offered one of two choices. He could either accept a lump-sum amount of $3609 now, or accept quarterly payments of $202 for the next five years. If the money is placed into a trust fund earning 6.28% compounded annually, which is the better option and by how much? The V option is better by $ . (Round the final answer to the nearest cent as needed. Round all intermediate values to six decimal places as needed.)

Answer 1

Present value of annuity= payment per period * [1-(1+i)^-n]/i  

i = interest rate per period

n = number of periods

=>

Present value of quarterly payments

= 202*4 * [1-(1+6.28%)^-5]/6.28%

= 3377.82

difference = 3609 - 3377.82

= 231.18

hence accept lump sum fund of $3609 better by 231.18