For winning your injury lawsuit against MacBurger, a structured settlement (annu

Question

For winning your injury lawsuit against MacBurger, a structured settlement (annuity) is set up in your honor. The annuity has a fixed annual interest rate of 4.2%, and interest is compounded monthly. You agree to get an equal payment of $1500 each month for 20 years. How much should MacBurger deposit into the account at the beginning to meet its monthly payout obligations? After receiving 48 months of payments, you contact J.G. Wentworth to get the remaining balance of your annuity paid out in one lump sum. Assume that there are no fees for this service. What lump sum do you get?

Explanation / Answer

a)

MacBurger Deposit = Monthly Amount*(1-(1+r)^-n)/r

Monthly Amount = 1500

r = 4.2%/12 = 0.35%

n = 20*12 = 240

MacBurger Deposit = 1500*(1-(1+0.35%)^-240)/0.35%

MacBurger Deposit = $ 243,281.09

b)

Lump Sum Amount after recieving 48 month = Monthly Amount*(1-(1+r)^-n)/r

Monthly Amount = 1500

r = 4.2%/12 = 0.35%

n = 20*12-48 = 192

Lump Sum Amount after recieving 48 month = 1500*(1-(1+0.35%)^-192)/0.35%

Lump Sum Amount after recieving 48 month = $ 209,448.98

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