a. You will receive 31 annual payments of $175,000, with the first payment being

Question

a. You will receive 31 annual payments of $175,000, with the first payment being delivered one year from today. The income will be taxed at a rate of 28 percent. Tax will be withheld when the checks are issued.

b. Beginning today, you will receive $125,000 each year for 30 years. The cash flow from this annuity will be taxed at 28 percent. You will also receive $530,000 at the end of year 30 which you will not have to pay tax on this amount.

Using a discount rate of 10 percent, which option should you select?

Explanation / Answer

a. Annual Net Receipt after tax=$175000-28%=$126000

Sum of PVF @10% for 31 year=9.479

PV of Inflow= $1194354

b. PV of Inflow= $973422.30

Option A is better and Should be selected

Year Cashflow Tax Net Inflow PVF @10% PV 0 125000 0 125000 1 $125,000.00 1 125000 35000 90000 0.909091 $81,818.18 2 125000 35000 90000 0.826446 $74,380.17 3 125000 35000 90000 0.751315 $67,618.33 4 125000 35000 90000 0.683013 $61,471.21 5 125000 35000 90000 0.620921 $55,882.92 6 125000 35000 90000 0.564474 $50,802.65 7 125000 35000 90000 0.513158 $46,184.23 8 125000 35000 90000 0.466507 $41,985.66 9 125000 35000 90000 0.424098 $38,168.79 10 125000 35000 90000 0.385543 $34,698.90 11 125000 35000 90000 0.350494 $31,544.45 12 125000 35000 90000 0.318631 $28,676.77 13 125000 35000 90000 0.289664 $26,069.79 14 125000 35000 90000 0.263331 $23,699.81 15 125000 35000 90000 0.239392 $21,545.28 16 125000 35000 90000 0.217629 $19,586.62 17 125000 35000 90000 0.197845 $17,806.02 18 125000 35000 90000 0.179859 $16,187.29 19 125000 35000 90000 0.163508 $14,715.72 20 125000 35000 90000 0.148644 $13,377.93 21 125000 35000 90000 0.135131 $12,161.75 22 125000 35000 90000 0.122846 $11,056.14 23 125000 35000 90000 0.111678 $10,051.03 24 125000 35000 90000 0.101526 $9,137.30 25 125000 35000 90000 0.092296 $8,306.64 26 125000 35000 90000 0.083905 $7,551.49 27 125000 35000 90000 0.076278 $6,864.99 28 125000 35000 90000 0.069343 $6,240.90 29 125000 35000 90000 0.063039 $5,673.55 30 125000 35000 90000 0.057309 $5,157.77 $973,422.30

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