Solve the problem.A woman can sell her computer graphics company for $900,000 cash or for $100,000 plus $65,000 at the end of each year for 4 years. (a) Find the present value of the annuity that is offered if money is worth 7% compounded annually. (b) If she takes the $900,000, spends $100,000 of it, and invests the rest in a 4-year annuity at 7% compounded annually, what size annuity payment will she receive at the end of each year? (c) Which is better, taking the $100,000 and the annuity or taking the cash settlement?

Question

A. (a) $297,227.79; 
(b) $265,705.31;
(c) $100,000 plus the annuity has a larger present value than $900,000. She should take $100,000 plus the annuity.
B. (a) $217,967.04; 
(b) $206,659.68;
(c) $100,000 plus the annuity has a smaller present value than $900,000. She should take the cash settlement.
C. (a) $330,253.10; 
(b) $295,228.12;
(c) $100,000 plus the annuity has a larger present value than $900,000. She should take $100,000 plus the annuity.
D. (a) $220,168.73; 
(b) $236,182.49;
(c) $100,000 plus the annuity has a smaller present value than $900,000. She should take the cash settlement.

Answer 1

Answer: D