Annuity (Present value)?
Explain why the present value of $23,910.86 is much less than the total of
all the 240 monthly payments of $200 each, which is $48,000.
Which would you rather have: $48,000 by receiving 200 payments each month or $23,910.86 now? Why?
- Wayne DeguManLv 71 month agoFavorite Answer
The whole idea of an annuity is that you invest an amount of money that will, over time pay you a certain amount at given intervals.
Interest is paid on what you invest, so when you receive a payment, interest is then added to what you still have invested. This grows over time to ensure you receive the agreed payments.
48000 over 240 months gives you 200/month...a handy amount to pay certain big bills.
If you take all the amount now, i.e. 23,910.86, it works out to be 99.63/month...about half the amount.
However, be honest, if you received it as a lump sum now...how long would it last?
- AmyLv 71 month ago
If you need the $200 per month to pay for food, then you would rather have the fixed income stream.
But if you don't need to spend anything yet, then take the lump sum and invest it at a much higher return. $23,910.86 invested in the stock market, would after 240 months have grown to roughly $100,000.