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Problem 1-11 (LO1.3) A financial company that advertises on television will pay you $52,000 now for annual payments of $10,000 that you are expected to receive for a legal settlement over the next 8 years. Use Exhibit 1-D What is the present value of the annual payment if you estimate the time value of money at 10 percent? Round your PV factor to 3 decimal places and final answer to the nearest whole dollar.) a. Present value b. Should you accept this offer? O No Yes
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Answer #1

a. Present value = PVAF @ 10% of 8 years * Annual payment to be received = 5.335 * $10,000 = $53,350

b. The answer is No

Reason : We should not accept this offer as the amount that we are getting now ( i.e. $52,000 ) from the company is less from the present value of all the future payments ( i.e. $53,350 )

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