A brilliant young scientist is killed in a plane crash. It is anticipated that h
ID: 2759456 • Letter: A
Question
A brilliant young scientist is killed in a plane crash. It is anticipated that he could have earned $420,000 a year for the next 40 years. The attorney for the plaintiff’s estate argues that the lost income should be discounted back to the present at 6 percent. The lawyer for the defendant’s insurance company argues for a discount rate of 12 percent. What is the difference between the present value of the settlement at 6 percent and 12 percent? Compute each one separately. Use Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your answers to 2 decimal places.)
Explanation / Answer
As per the table when we find the value for 12% and 40 years (PV@12%,40 years) is
Present value
= Amount to be received per year*(PV@12%,40 years)
=$4,20,000* 8.24377
=$3,462,386.21
As per the table when we find the value for 6% and 40 years (PV@6%,40 years) is
Present value
= Amount to be received per year*(PV@6%,40 years)
=$4,20,000* 15.0463
=$6,319,444.67
Difference between the 2 interest rates=
=$6,319,444.67-$3,462,386.21
=2,857,058.46
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.