Answer:
Explanation:
The option that is not a lump sum speaks of an Annuity. A series of payments over a time.
The way to calculate this question is thus to find out how much the total value of that Annuity would be today. That figure is how much you should accept TODAY as a lump sum as opposed to going 20 years receiving $35,000.
The Present Value of an Annuity formula is this,
= Annual Payment*(1-(1+r)^-n)/r
r is the rate
n is the number of periods
= 35000*(1-(1+0.06)^-20)/0.06
= $401,447.24
Therefore, the minimum amount you should take as a lump sum today would be $401,447.24 because anything less and the other option is a better option.
Please do react or comment if you need any clarification. Thank you.
