A 65 year-old man is retiring and can take either $500,000 in cash or an ordinary annuity that promises to pay him $50,000 per year for as long as he lives.Which of the following statements is MOST correct?
A) Because of the time value of money, the man will always be better off taking the $500,000 up front.
B) The higher the interest rate, the more likely the man will prefer the $500,000 lump sum.
C) If the man expects to live more than 10 years, then he will prefer the annuity.
D) If the man is certain the company will not default on its future payments, he should select the $50,000 per year.

Question

Quizplus · Accepted Answer

The higher the interest rate, the more valuable the lump sum becomes because the man could potentially earn more by investing the $500,000 at a higher rate. This makes the lump sum more attractive compared to the fixed payments of the annuity.

A 65 Year-Old Man Is Retiring and Can Take Either