Eichelberger Trucking won a settlement in a lawsuit and was offered four differe

Question

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 7%. Ignoring the eax considerations. which of the following four alternatives has the highest present value? 1) $180,000 now 2) $52,000 per year for the next 4 years (end-of-year payments) 3) $5,000 now and then $24,000 per year for the enxt 10years(end of year payments). Hint: calculate the present value of the initial P00 separately. Then calculate the present value the $24,000 annuity separately. Finally, add the two present value amounts together to get the overall present value. 4) $9,100 per yaer for the next 10 years (end of year payments) plus a lump sum payment of $200,000 at the end of the 11th year. Hint: calculate the present value of the $9,100 10-year annuity separately. Then calculate the present value the $200,000 payment received at the end of year 11 separetely. Finally, add the two present value amounts together to get the overall present value.

Explanation / Answer

1) $180,000 now

Present value = $180,000

2) $52,000 per year for the next 4 years (end-of-year payments)

Present value of an ordinary annuity – plug into calculator number of periods 4, interest rate 7%, payment = -52,000, future value = 0, solve for present value and get: 176,134.99

Present value = 176,134.99

3) $5,000 now and then $24,000 per year for the enxt 10years(end of year payments). Hint: calculate the present value of the initial P00 separately. Then calculate the present value the $24,000 annuity separately. Finally, add the two present value amounts together to get the overall present value.

Present value of ordinary annuity – plug into calculator number of periods = 10, interest rate 7%, payment = -24,000, future value = 0, solve for present value and get 168,565.96. Add the 5,000 to it to get 173,565.96.

Present value = 173,565.96.

4) $9,100 per yaer for the next 10 years (end of year payments) plus a lump sum payment of $200,000 at the end of the 11th year. Hint: calculate the present value of the $9,100 10-year annuity separately. Then calculate the present value the $200,000 payment received at the end of year 11 separetely. Finally, add the two present value amounts together to get the overall present value.

Present value of ordinary annuity – plug into calculator number of periods = 10, interst rate = 7%, payment = -9,100, future value = 0, solve for present value and get 63,914.59.

Presnt value of lump sum = 200,000/(1.07^11) = 95018.56.

Together they are 158,933.15.

Present value = 158,933.15

The highest is #1, $180,000 now.

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