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 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. 2) $56,000 per year for the next 4 years (end-of-year payments) 3) $5,000 now and then $27,000 per year for the next 10 years (end-of-year payments).4) $12,000 per year for the next 10 years (end-of-year payments) plus a lump sum payment of $230,000 at the end of the 11th year. hfnt: Calculate the present value of the $12,000 10-year annuity separately. Then calculate the present value the $230,000 payment received at the end of year 11 separately. Finally, add the two present value amounts together to get the overall present value.

Explanation / Answer

Option 1 $180000 now So present Value is 180000*1 $180,000 Option 2 Cash flow 56000 in next four years 56000 PVIFA (8%,4) 3.3121 rounded off Present Value 185477.6 185478 Option 3 Initially I 5000 $27000 per year for 10 years   C 27000 PVIFA (8%,10) P 6.7101 Present Value I+ (C*P) 186172.7 186173 Option 4 $12000 per year for 10 years 12000 PVIFA (8%,10) 6.7101 Present Value for 10 years A 80521.2 $230000 at end of 11 year 230000 PVIF(8%,11) 0.4289 Present Value in 11th year B 98647 Total Present Value A+b 179168.2 179168 Highest Present Value is for Option C $186172.7 Rounded off $186173

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