Fundamentals of Financial Accounting 4th Edition by Fred Phillips,Robert Libby,Patricia Libby

Exercise 12

Comparing Options Using Present Value Concepts
After incurring a serious injury caused by a manufacturing defect, your friend has sued the manufacturer for damages. Your friend received three offers from the manufacturer to settle the lawsuit (1) receive an immediate cash payment of $100,000, (2) receive $6,000 per year for life (your friend's remaining life expectancy is 20 years), or (3) 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. Which option would you recommend and why