There are six problems. Each one is worth the score indicated next to the proble

Question

There are six problems. Each one is worth the score indicated next to the problem number. Show all work for complete credit (or partial credit). You may attach extra pages if you so desire. Please be NEAT when writing your answers I cannot grade illegible work. 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. $180,000 now. $52,000 per year for the next 4 years (end-of-year payments) $5,000 now and then $24,000 per year for the next 10 years (end-of-year payments). $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.

Explanation / Answer

Option (1) is best for Eichellberger Trucking. Because it has the highest Present Value of $180000

Year PV Factor @ 8% Option 1 Payment Received PV of Option 1 Option 2 Payment Received PV of Option 2 Option 3 Payment Received PV of Option 3 Option 4 Payment Received PV of Opion 4 0 1 $180000 $180000 $0 $0 $5000 $5000 $0 $0 1 0.926 $52000 $48152 $24000 $22224 $9100 $8426.6 2 0.857 $52000 $44564 $24000 $20568 $9100 $7798.7 3 0.794 $52000 $41288 $24000 $19056 $9100 $7225.4 4 0.735 $52000 $38220 $24000 $17640 $9100 $6688.5 5 0.681 $24000 $16344 $9100 $6197.1 6 0.630 $24000 $15120 $9100 $5733 7 0.583 $24000 $13992 $9100 $5305.3 8 0.540 $24000 $12960 $9100 $4914 9 0.500 $24000 $12000 $9100 $4550 10 0.463 $24000 $11112 $9100 $4213.3 11 0.429 $200000 85800 Total $180000 $172224 $166016 $146851.9 or $146852 (approx)

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