Question

You see a commercial for G.J. Worthwent and they are offering to give you cash now for your structured settlement. You remember that you do have an annuity that is paying you $500 a month ($6,000 per year) that you had been using for your child’s education expenses. Now that your young one has graduated, you really do not need the monthly check anymore but would like to buy them a graduation present and need cash now so you call G.J. Worthwent and see what they will offer you. After asking you a bunch of questions, they say they can wire you the amount of $10,000 now. Assuming you have three years left and that inflation is a modest 3%, does this seem like a fair offer to you? Show calculations for full credit.

Answer 1

Solution

In this case We have 2 options either continue with annuity or Take 10000 now

We need to choose ,which is better

We need to find the Present value of annuity of 500 /month discounted @3%(inflation rate)

PV of annuity=Annuity amount*(((1-(1/(1+r)^n)))/r)

Here r= discount rate /period=3/12=0.25%

n= number of periods=3*12=36

Annuity amount=500

PV of annuity=500*(((1-(1/(1+.0025)^36)))/.0025)

=17193.233

Since PV of annuity ($500/month) is greater than the amount being offered today,it is not a fair offer (10000 today)

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