Question

We won our lawsuit against Dewey, Cheetum, and Howe. We have four options for receiving our settlement:

Option A: Receive $100,000 today.

            Option B: Receive $108,000 on year from today.

            Option C: Receive $20,000 a year for 8 years.

            Option D: Receive $10,000 a year for 30 years.

We can invest our settlement at an interest rate of 8% compounded annually. Which Option should we choose? You must show your work!

Answer 1

Ans: Option is C Can choose as It is generating present value of $$114,932.77 higher than any other options

Option A

Receive $100,000 Today

Option B:

Receive $108,000 on year from today

PV Factor at 8% 1 year=108,000*0.925925=$100,000(Present Value)

Option C:

Receive $20,000 a Year for 8 Years

Present Value Factor at 8% for 8 years cumulative=

5.746638

Present value =20,000*5.746638=$114,932.77

Option D:

Receive $10,000 a year Upto 30 Years

Present Value Factor at 8% for 30 years cumulative=

11.2577833*10,000=$112577.83

Options	Total receipts	PV of receipts
A	100000	100000
B	108000	100000
C	160000	$114,932.77
D	300000	112577.83