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.