Solve the problem.A dentist can sell his practice for $1,100,000 cash or for $250,000 plus $270,000 at the end of each year for 4 years. (a) Find the present value of the annuity that is offered if money is worth 8% compounded annually. (b) If she takes the $1,100,000, spends $250,000 of it, and invests the rest in a 4-year annuity at 8% compounded annually, what size annuity payment will she receive at the end of each year? (c) Which is better, taking the $250,000 and the annuity or taking the cash settlement?

Question

A. (a) $697,533.91; 
(b) $255,726.92;
(c) $250,000 plus the annuity has a smaller present value than $1,100,000. She should take the $250,000 plus the annuity. She should take the cash settlement.
B. (a) $992,644.41; 
(b) $253,613.48;
(c) $250,000 plus the annuity has a larger present value than $1,100,000. She should take $250,000 plus the annuity.
C. (a) $894,274.25; 
(b) $256,632.68;
(c) $250,000 plus the annuity has a larger present value than $1,100,000. She should take $250,000 plus the annuity.
D. (a) $581,278.26; 
(b) $241,234.72;
(c) $250,000 plus the annuity has a smaller present value than $1,100,000. She should take the cash settlement.

Answer 1

Answer: C