A family member passes away and leaves you an inheritance. The terms of the will specify that you may choose between annual payments of $50,000 at the end of each of 5 years, or a lump sum payment of $200,000 now. Seeing this as an opportunity to start saving for the future, you plan to invest the full amount of the inheritance in a mutual fund that earns 10% annually.
a. On purely financial grounds, which option should you choose and why?
b. What annual payment amount would make you indifferent between the $200,000 lump sum now option and the annual payments at the end of each of 5 years?