Minnie Mouse was injured by new cosmetics and as a result is entitled to some damages...

Minnie Mouse was injured by new cosmetics and as a result is entitled to some damages compensation. The insurance company has offered her the choice of an annual payment each year for the next 35 years, with the first payment being made today, or a lump sum payment now of $4.6 million. If a fair return is 4.2% p.a., how large must the annual payment be to leave her as well off financially as with the lump sum?

Expert Solution

Sol:

Present value (PV) = $4.6 million

Interest rate = 4.2%

Period (NPER) = 35 years

To determine how large must the annual payment be to leave her as well off financially as with the lump sum we can use PMT function in excel:

PV	-4600000.00
Interest rate	4.2%
NPER	35
Annual payment	$242,984.21

Therefore the annual payment will be to leave her as well off financially as with the lump sum is $242,984.21.

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jeff jeffy answered 2 years ago

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