In: Finance
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?
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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