You are negotiating the terms of a legal settlement. You have been given several different settlement options. Your average rate of return on the assets you currently hold is 5% and you expect to continue receiving that rate. You have a choice of receiving:

• A lump sum today (t0) of $30,000 and payments of $5,000 at the end of the year for the next 7 years (total of 8 payments). Your total payout is $65,000 for the duration of the agreement.

• Equal payments of $7,500 for the next 10 years at the end of each year (total of 10 payments). Your total payout is $75,000 for the duration of the agreement.

• Equal payments of $13,000 starting today and continuing annually for the next 4 years (total of 5 payments). Your total payout is $65,000 for the duration of the agreement.

a) What is the present value of each alternative?

b) Explain why receiving money today is better than receiving the same money later.

Answer rating: 100% (QA)

a To calculate the present value of each alternative we need to discount the future cash flo... View the full answer