At the time of his retirement, Mr A is given a choice between two alternatives: a. an annual pension of Rs 10,000 as long as he lives b. a lump sum amount of Rs 50,000. If Mr A expects to live for 15 years and the interest rate is 15 percent, which option appears to be more attractive?
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At the time of his retirement, it is better if Mr A's choice is (a) an annual pension of Rs 10,000 as long as he lives.
The present value of an annual pension of Rs. 10,000 for 15 years when
r = 15 % is given by :
⇒ 10,000 x PVAF (15% , 15years)
= 10,000 x (1-(1+r)^-n)/r
= 10,000 x 5.84737 = Rs 58,473.700
The second alternative is to receive a lump sum of Rs 50,000
Therefore, Mr. A will be better off with the annual pension amount of Rs. 10,000.
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