esire. Please be NEAT when writing your answers. I cannot grade illegible work.

Question

esire. Please be NEAT when writing your answers. I cannot grade illegible work. (40 points possible) 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 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 next 10 years (end-of-year payments). Hint Calculate the present value of the initial $5,000 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 year for the next 10 years (end-of-year payments) plus a lump sum payment of $200,000 at the end of the 11th year of the $9,100 10-year annuity separately. Then calculate the present value the $200,000 payment received at the end of year 11 separately. Finally, add the two present value amounts together to get the overall present value Hint: Calculate the present value

Explanation / Answer

Alternative 1 Alternative 2 Alternative 3 Alternative 4 Years 0 1-4 0 1-10 1-10 11 Cash payments 180000 52000 5000 24000 9100 200000 Interest rate 8% 8% 8% 8% 8% 8% Discounting factor 1 3.3121 1 6.7101 6.7101 0.4289 Present Value 180000 172229 5000 161042 61062 85780 Net present value 180000 172229 166042 146842 Alternative 1 has the highest net present value.

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