Question: Working as a grip in a TV production remake of The Little Rascals; you suffered a workplace accident, which has left you unable to work for the next five years. Your employer's insurer has offered you a choice of accepting either of two 5-year cash flow streams or lump sum amounts. You may accept settlement A or settlement B either as a cash flow stream or as a lump sum. Given the cash flow stream and lump-sum amounts associated with each, and assuming that you can earn an 8% rate of return, which alternative (A or B) and in which form (cash flow stream or lump-sum amount) would you prefer?
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Cash flow stream
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End of Year
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Alternative A
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Alternative B
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1
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$45,000
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$70,700
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2
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45,000
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58,000
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3
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45,000
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45,000
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4
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45,000
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32,150
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5
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45,000
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19,300
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Lump-sum amount
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Now
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$181,600
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$180,000
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