Question: 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

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 $10,000 per year for life.

(c) Receive $7,000 per year for 10 years and then $10,000 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 your friend’s remaining life expectancy is 20 years.

Required:

1. Calculate the present value of each option.

2. Explain which option your friend should prefer and why.

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