A pension fund pays out $50,000 a year in perpetuity, based on a cost of capital of 5%, to retiring employees.Alternatively, the employee can take out a lump sum of $1 million payable immediately.The employee should choose

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Quizplus · Accepted Answer

The present value of the perpetuity can be calculated using the formula PV = P / r, where P is the payment ($50,000) and r is the rate (5% or 0.05). This gives a present value of $50,000 / 0.05 = $1,000,000, which is equal to the lump sum option, indicating that both options provide the same value over time.

A Pension Fund Pays Out $50,000 a Year in Perpetuity