One of your clients has asked your advice on the best way to accept payment on a

Question

One of your clients has asked your advice on the best way to accept payment on a sale. The client has been offered $170,000 immediately or $28,000 per year for ten years with the first payment due immediately. The appropriate interest rate is 10%. Present value factors for the present value of an ordinary annuity of $1 per period are shown below.

9 per., 10%, 5.75902
10 per., 10%, 6.14457
11 per., 10%, 6.49506

the calculation for the present value of the $28,000 annuity is:
a. $28,000 X 6.14457
b.$28,000 X (5.75902+6.14457)/2
c.$28,000 X (6.14457+6.49506)/2
d. $28,000 X (1.0+5.75902)

please show work

Explanation / Answer

We have to compare an immediate payment of $170,000 or PV of annuity due of PMT=$28,000 for n=10yrs & i=10% PVA of annuity due = PMT*(PVIFAi,n)*(1+i) ie PVA = $28000*(PVIFA10%,10)*(1+10%) = $28,000*6.14457*1.10 = $28000*6.75902 ie PVA = $28000*(1.0+5.75902) So ans (d) is correct

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