Value of an annuity versus a single amount Mark is due to retire in a month’s time and one of his pension funds has offered him two alternatives. His money can be received either in the form of $16,000 at the end of each of the next 25 years (i.e., a total of $400,000 over 25 years) or as a single lump sum amount of $200,000 paid immediately.

a. If Mark can earn 4% annually on his investments over the next 25 years, which alternative he should take? Ignore taxes and any other considerations.

b. Would Mark’s decision in part a change if he could earn 8% rather than 5% on his investments over the next 25 years? Why?

c. At approximately what interest rate would Mark be indifferent between the two options?