A brilliant young scientist is killed in a plane crash. It is anticipated that h

Question

A brilliant young scientist is killed in a plane crash. It is anticipated that he could have earned $330,000 a year for the next 50 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 defendants 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.) Present Value PV at 6% rate $ PV at 12% rate Difference

Explanation / Answer

Explanation

Pv 6% = A x ( (1-(1/(1+i)n))/i       )

           =$ 330,000 x ( (1-(1/(1.06)50))/0.06)

       =$ 5201414.01

Pv 12% = A x ( (1-(1/(1+i)n))/i     )

           =$ 330,000 x ( (1-(1/(1.12)50))/i0.12)

       =$ 2740484.50

Diffrance=       =$ 5201414.01-$ 2740484.50

           =$ 2460929.51

2)

Airborne Airliance

a)

I = interest paid annually in dollars

FV = Face value

CV = Current Value (price)

N = Number of years to maturity

YTM = Yield to maturity

YTM = $ 106+ (1000-860)/20 / (1000+860)/2

=12.54%

B)

After-tax Cost of Debt = Before-tax Cost of Debt × (1 – Tax Rate)

= 12.54% × (1-0.4)

=7.52%

Particualr Prasent
Value in $ PV at the 6 % rate 5201414.01 PV at the 12 % rate 2740484.5 Diffrace 2460929.51

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