1. (10 points) Eichelberger Trucking won a settlement in a lawsuit and was offered four
different payment alternatives by the defendant's insurance company. The interest rate
is 8%. Ignoring the tax considerations, which of the following four alternatives has the
highest present value (and thus is the best option)? Support your answer with the
appropriate calculations...
1) $180,000 now...
.
Present value = $180,000..
2) $70,000 per year for the next 4 years (end-of-year payments)..
3) $15,000 now and then $33,000 per year for the next 10 years (end-of-year
payments). Hint: Calculate the present value of the initial $15,000 separately. Then
calculate the present value the $33,000 annuity separately. Finally, add the two
present value amounts together to get the overall present value...
4) $17,000 per year for the next 10 years (end-of-year payments) plus a lump sum
payment of $245,000 at the end of the 11$^{th}$ year.
Hint:
Calculate the present value of the $17,000 10-year annuity separately. Then
calculate the present value the $245,000 payment received at the end of year 11
separately. Finally, add the two present value amounts together to get the overall
present value...