Answer:
a.
We use the formula for calculating present value of annuity to solve the question as followed:
(22,500/10%) x [ 1 - 1.1^(-10) ] = $138,253.
b.
The present value of the total severance package is calculated as:
120,000 cash paid at the beginning + Present value of $131,000 paid in one year time + Present value of 7 annuities paid at the end of each year starting from the end of this year = 120,000 + 131,000/1.06 + [ 29,500/6% x (1 - 1.06^(-7)) ] = $408,265.
c.
Option 1: to collect lump sum of $107,000 today will give present value of $107,00
Option 2: to collect seven equal $20,500 at the end of each year will give present value as calculated below by applying the present value formula for annuity:
(20,500/8%) x ( 1 - 1.08^-(7)] = $106,731.
d.
The present value of this investment is equal to:
Present value of the annuity made of 8 equal payments at the end of each year, $15,000 each + Present value of $150,000 receipt paid in 8 year time = (15,000/7%) x [1 - 1.07^(-8) ] + 150,000/1.07^(-8) = $176,871.
Explanation:
