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 10%. 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.
A) $180,000 now.
B) $52,000 per year for the next 4 years (end-of-year payments)
C) $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.
D) $14,100 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. Hint: Calculate the present value of the $14,100 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.