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re: Would you choose $5 MILL in one check today, or $7.5 MILL paid over 5 years?
Posted on 8/25/15 at 3:20 pm to The Mick
Posted on 8/25/15 at 3:20 pm to The Mick
if you loaned someone $5 mil and they paid you $125,000 per month for 60 months ($7.5 mil) you would earn interest of 17.274%. that's pretty reasonable return, assuming no risk. regardless, it's not enough money to be worth doing the math. just toss it in the petty cash drawer.
0
Posted on 8/25/15 at 3:24 pm to Boudreaux35
quote:
You'd have to make some real risky and CORRECT investments to get a 50% return over 5 years
Wouldn't be that risky
You'd have to get a return of about 8.5% annually
With that type of investment capital you could probably find a really good manager to get you at least that. There would be some fees obviously.
Posted on 8/25/15 at 3:30 pm to Powerman
quote:While it may not be THAT risky, it's far riskier than the alternative. It means means that you would have to invest all 5 million just to break even while assuming you wouldn't invest any of the 1.5 million you get each year. There is just no reasonable scenario where the 5 million lump sum >>>> 1.5 million each year for 5 years.
Wouldn't be that risky You'd have to get a return of about 8.5% annually With that type of investment capital you could probably find a really good manager to get you at least that. There would be some fees obviously.
This post was edited on 8/25/15 at 3:33 pm
Posted on 8/25/15 at 3:32 pm to Powerman
quote:
You'd have to get a return of about 8.5% annually
This is only correct under the assumption that you aren't investing your annuities, which is silly. I also have a 7 million dollar receivable I can borrow against at next to nothing right now if I felt so inclined. It would be pretty unwise to turn down the 7.5MM guaranteed in life/death over 5 years.
Posted on 8/25/15 at 3:34 pm to logjamming
quote:
You could invest part of it and will earn more than 7.5 over the five years.
The solution is to determine the net present value of a stream of payments over a 60 month period. With a return of 1.5% compounded monthly it's a wash--NPV is 4.98 million. At any higher rate of return it's more advantageous to take the money up front. At 6% the NPV of $125,000 a month for 60 months is only 2 million.
Posted on 8/25/15 at 3:34 pm to The Mick
$5MM would become $7.69MM in 5 years at an annual return on investment of 9%. If you can beat 9% then you should take the $5MM but if not then you should take the $7.5MM.
Posted on 8/25/15 at 3:36 pm to PokerPlayingTiger
quote:But you can still invest the 7.5 million in the OP's scenario.
$5MM would become $7.69MM in 5 years at an annual return on investment of 9%. If you can beat 9% then you should take the $5MM but if not then you should take the $7.5MM.
Posted on 8/25/15 at 3:36 pm to The Mick
Easy... 7.5 paid over 5 years. That bests the inflation rate and you could escape more taxes that way.
Posted on 8/25/15 at 3:36 pm to LSUAfro
$5MM immediately. I need 2.5 to retire the other 2.5 would be blown on hookers and blow at a Monaco casino within 2 years tops.
Posted on 8/25/15 at 3:37 pm to buckeye_vol
I agree.
Posted on 8/25/15 at 3:38 pm to PokerPlayingTiger
Regardless, you won't get $5MM, so comparative investing is a moot point.
Posted on 8/25/15 at 3:38 pm to MontyFranklyn
quote:
You can do the same taking it over 5 years. Taking $7.25 over 60 months is 120,833.33 per month. I would keep $20k per month and put the $100k into an investment.
Can I have the other $833.33?
Posted on 8/25/15 at 3:39 pm to buckeye_vol
To break down the numbers correctly you have to discount the 5 years of cash flow from the $7.5M to an NPV.
In the most basic sence, if you take $5M today and want to grow it to $7.5M in 5 years, then it requires a 10.7% annual return (10.7% is CAGR). That is a pretty solid return you would have to guarantee using this rudimentary math.
The better way is discount each monthly payment by a discount rate of 2% for inflation, but then operate under the same assumptions that you are investing each payment over the 5 years to determine where you are at year 5 when all payments have been received.
Given the cash flows occurring monthly for 60 payments and assuming a positive return >2% (greater than inflation), then this would mean the perosn with the $5M option would have to guarantee gains even greater than the 10.7% noted earlier.
Given the riskiness involved, I'm going with the $7.5M option.
In the most basic sence, if you take $5M today and want to grow it to $7.5M in 5 years, then it requires a 10.7% annual return (10.7% is CAGR). That is a pretty solid return you would have to guarantee using this rudimentary math.
The better way is discount each monthly payment by a discount rate of 2% for inflation, but then operate under the same assumptions that you are investing each payment over the 5 years to determine where you are at year 5 when all payments have been received.
Given the cash flows occurring monthly for 60 payments and assuming a positive return >2% (greater than inflation), then this would mean the perosn with the $5M option would have to guarantee gains even greater than the 10.7% noted earlier.
Given the riskiness involved, I'm going with the $7.5M option.
Posted on 8/25/15 at 3:45 pm to The Mick
1) $5M now.
2) 30 year deferred annuity.
3) Profit
2) 30 year deferred annuity.
3) Profit
Posted on 8/25/15 at 4:01 pm to lynxcat
quote:
lynxcat
Posted on 8/25/15 at 4:04 pm to logjamming
quote:
$5 million now. /thread. You could invest part of it and will earn more than 7.5 over the five years.
I don't think people are considering that if you are capitalizing the 5 mil over 5 years you also have to capitalize the 7.5 at the same rate or else any comparison is silly. Taking a guaranteed return of 2.5 Mil over 5 years should be the biggest no brainer ever. How much is the market lost over 3 days? What if you stuck half the 5 into the market last week and we go into a prolonged bear market? You won't come close to the 2.5 over 5 that you thought you would. Not that you won't eventually get there but you likely won't get there in 5.
This post was edited on 8/25/15 at 4:13 pm
Posted on 8/25/15 at 4:54 pm to Layabout
Way, way off. If you're doing it monthly, you need to divide your rate by 12. The 1.5% monthly rate you're using is equivalent to an 18% annualized yield, approximately.
Posted on 8/25/15 at 5:17 pm to slackster
5mill now
2.5 to rage
2.5 to triple up at the Baccarat Table
2.5 to rage
2.5 to triple up at the Baccarat Table
Posted on 8/25/15 at 5:22 pm to The Mick
7.5 over 5 years. Assuming both amounts are after taxes?
Posted on 8/25/15 at 6:07 pm to slackster
quote:
Way, way off. If you're doing it monthly, you need to divide your rate by 12. The 1.5% monthly rate you're using is equivalent to an 18% annualized yield, approximately.
"Compounded monthly" implies that the 1.5% will be divided by 12 for the monthly calculation.
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