Question

As a settlement for an insurance​ claim, Craig was offered one of two choices. He could either accept a​ lump-sum amount of ​$8799 ​now, or accept monthly payments of $129 for the next seven years. If the money is placed into a trust fund earning 5.55​% compounded annually​, which is the better option and by how​ much?

Option A - Monthly Payments

Option B - Lump Sum

​(Round the final answer to the nearest cent as needed. Round all intermediate values to six decimal places as​ needed.)

Answer 1

	We have to convert the annual rate to monthly compounding rate
	Annual rate compounded monthly =		((1+5.5%)^(1/12)-1)*12
	Annual rate compounded monthly =		5.37%
	Monthly rate = 5.37%/12			0.45%
	Now we have to compute the present value of both the option
Option A: monthly payment
	we have to use financial calculator to sovle this
	put in calculator
	FV		0
	PMT		-129
	I		0.45%
	N	7*12	84
	compute PV		$ 9,016.85
Option B: Lump sum		$ 8,799.00
	Option A monthly payment has the higher value by	$ 217.85
	Therefore option of monthly payment should be preferred