You were given a $3,000,000 lump-sum award today. A financial company ABC gives you the following offer:
Question:
You were given a $3,000,000 lump-sum award today. A financial company ABC gives you the following offer: "Give us your $3,000,000 and we will pay you a fixed amount of $230,000 every year for the next 20 years. The first payment will come one year from today, the last payment will come 20 years from today. This is a great deal because during the life of the contract, we will pay you 20 x $230,000 = $4,600,000!"
You were already thinking about investing the award, and you believe you should be generating at least 5% return (per year) for any investment similar (in terms of risk) to the one company ABC is offering. Should you accept their offer?
Hint: Your answer has to be number-driven and based on values provided above and should be centered on what you learned about valuation of sequences of cash flows. No "feelings", "intuitions", "experiences" etc.
Business and Administrative Communication
ISBN: 978-0073403182
10th edition
Authors: Kitty o. locker, Donna s. kienzler