They offered the hospital a choice between a $60,000 annual payment forever, or a lump sum of $700,000 today.

Question

When considering the time value of money, please answer the question in the following case. Upon the death of their wealthy uncle, his heirs wanted to memorialize him with a named donation to the local hospital. They offered the hospital a choice between a $60,000 annual payment forever, or a lump sum of $700,000 today. What is the best choice for the hospital given the hospital can earn an ave. of 5% annually on this donation?

Answer 1

It is a no-brainer. A $60,000 annual perpetuity has a present value of 60,000 / .05 = 1,200,000. A $700,000 fund invested at 5% yields only $35,000 annually.