When Mr. Shafer died, his estate after taxes amounted to $300,000. His will provided that Mrs. Shafer would receive $24,000 per year starting immediately from the principal of the estate and that the balance of the principal would pass to the Shafers’ children upon Mrs. Shafer’s death. The state law governing this estate provided for a dower option. If Mrs. Shafer elects the dower option, she renounces the will and can have one-third of the estate in cash now. The remainder will then pass immediately to their children. Mrs. Shafer wants to maximize the present value of her bequest. Should she take the annuity or elect the dower option if she will receive 5 payments and discounts payments at a. 8% per year? b. 12% per year? (Note this problem explicitly states that Mrs. Shafer will receive 5 payments. In reality, life expectancy is uncertain. The correct calculation combines a mortality table with the present value tables. Actuaries deal with such calculations.)
