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

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

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