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.
1. $180,000 now.
2. $70,000 per year for the next 4 years (end-of-year payments)
3. $15,000 now and then $33,000 per year for the next 10 years (end-of-year payments). Hint: Calculate the present value of the initial $15,000 separately. Then calculate the present value the $33,000 annuity separately. Finally, add the two present value amounts together to get the overall present value.
4. $17,000 per year for the next 10 years (end-of-year payments) plus a lump sum payment of $245,000 at the end of the 11th year. Hint: Calculate the present value of the $17,000 10-year annuity separately. Then calculate the present value the $245,000 payment received at the end of year 11 separately. Finally, add the two present value amounts together to get the overall present value.