A delivery driver for appliance Warehouse (AW) struck and killed a pedestrian in
ID: 2718371 • Letter: A
Question
A delivery driver for appliance Warehouse (AW) struck and killed a pedestrian in a crosswalk. The widow of the man killed has threatened to sue AW for wrongful death. AW's liability insurer would like to settle the case out-of-court to minimize legal defense costs and authorized AW to offer three settlement options:
Option 1: Five annual payments of $175,000, with the first payment in one year
Option 2: Four payments of $225,000, with the payments two years, four years, six years, eight years from today
Option 3: A payment of $300,000 today and $550,000 four years from today
Assume a 6% discount rate, which settlement option is best from the insurer's perspective?
Explanation / Answer
Option 1 is the best as the NPV is highest in that case.
PV of cash flow = cashflow/(1+i)^n where i = 6% and n is the number of period.
Option1 Present value at 6% Option2 Present value at 6% Option3 Present value at 6% Year 0 - - - - 300,000 300,000 1 175,000 165,094 - - - - 2 175,000 155,749 225,000 200,249 - - 3 175,000 146,933 - - - - 4 175,000 138,616 225,000 178,221 - - 5 175,000 130,770 - - 550,000 410,992 6 - - 225,000 158,616 - - 7 - - - - - - 8 - - 225,000 141,168 - - Total 737,164 678,254 710,992Related Questions
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