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We should briefly mention that what you say is true in an inflationary environment. It is not true in a deflationary environment. If prices are going down, I probably would rather have 1,000 a year from now than 1,000 now, as long as I understand the risk of failure of the other party to pay.
Even in a deflationary environment that’s only true if:
a) effective interest rates are negative, and however you manage your money (cash, bank, any sort of investment) you’re sure/likely to lose a part
b) you have absolutely no use for the money now
Thanks for this article – very helpful indeed!
I was recently looking at and interesting example of this in a US inheritance tax assessment from 1884! The deceased had left the income of his estate to his wife for the duration of her life (the estate was stocks and real estate) and then the proceeds to be inherited by descendants after her death. Assuming no inheritance tax between married couples how much inheritance tax should be charged in 1884? You have variability of the asset value, but also variability of the term as well.
Another example would be the Set for Life lottery game (winning £10K/mo tax free for 30 years)
How much would you accept as a lump sum alternative?
@Andrew, that’s a fairly simple annuity calculation. At 3% inflation your lumpsum should be £2,377,823.55… ish