Comparing Options Using Present Value Concepts
After incurring a serious injury caused by a manufacturing defect, your friend has sued the manufacturer for damages. The manufacturer made your friend three offers to settle the lawsuit;
(a)Receive an immediate cash payment of $100,000.
(b)Receive $6,000 per year for life (your friend’s remaining life expectancy is 20 years).
(c)Receive $5,000 per year for 10 years and then $7,000 per year for life (this option is intended to compensate your friend for increased aggravation of the injury over time).
Your friend can earn 8 percent interest and has asked you for advice.
Required:
1.Calculate the net present value of each option.
2.Explain which option your friend should prefer and why.
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