You have been given a choice between two retirement policies as described below
Policy A: You will receive equal annual payments of $10,000 beginning 35 years from now for 10 years.
Policy B: You will receive one lump-sum of $100,000 in 40 years from now.
Which policy would you choose? Assume rate of interest is 6 percent.
Policy A: present value of the annuity at the beginning of the 35 years from now:
PVA = (10,000/0.06 ) × [1-1/(1.06 )10] = $73,600
Policy B: present value of the lump-sum at the beginning of the 35 years from now:
PV = 100,000(1.06 )-5 = $74,726
I will choose policy B.
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