Your late Uncle Joe passed away and left you an heritance of $1,000,000. But, he stipulated in his Will that you could have an option of either having the $1,000,000 up front, in one lump sum, or you could have annual payments of $65,000 for 25 years, or a total of: 25 x $65,000=$1,625,000.

If long-term interest rates, at the time of your decision, are 5% compounded semi-annually, which deal is the best for you? thanks for help.

Guest Apr 14, 2017

#1**0 **

To compare the two, you just have find the PV of the 25 payments and compare it to the $1,000,000.

Use this formula to do that. However, since the interest is compounded semi-annually, you have to convert it to annual compound to match the stream of payments.

So, 5% compounded semi-annually =5.0625% compounded annually. Here is the formula:

PV=P{[1 + R]^N - 1 /[1 + R]^N}/ R

PV =65,000{{1.050625]^25 - 1 /[1.050625]^25} / [0.050625]

PV =65,000 x 14.00607984......

**PV=$910,395.19 - Since this PV is smaller than the $1,000,000, then $1,000,000 up front is a better deal. This is NOT taking taxes into account.**

Guest Apr 14, 2017