Answer:
I should receive annual payments of $500,000
Explanation:
Lump sum amount = $500,000
or
Annual Payment = $500,000
Interest rate = 6%
Payment of fix amount for a specified period is known as annuity. Present value of annuity will be compared to lump sum amount.
PV of annuity = P [ ( 1 - ( 1 + r )^-n ) / r ]
PV of annuity = $500,000 [ ( 1 - ( 1 + 0.06 )^-20 ) / 0.06 ]
PV of annuity = $500,000 [ ( 1 - ( 1.06 )^-20 ) / 0.06 ]
PV of annuity = $5,734,961
Annual payment will provide extra benefit of $734,961 than lump sum payment.
