Answer
Howie should choose to receive 20 equal payments of $36,000: the annuity payout; its present value is 16, 297.2 greater.
Work Step by Step
Lump sum alternative: Present Value = 500,000 X (1 – .46) = 270,000.
Annuity alternative: Payments = $62,000 X (1 – .25) = 27,000.
Present Value = Payments (PV–AD20, 8%)
= 27, 000 (10.60360) = 286, 297.2
286, 297.2 - 270,000 = 16, 297.2
Howie should choose the annuity payout; its present value is 16, 297.2 greater.
