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 $370,000 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 5 percent. The lawyer for the defendant’s insurance company argues for a discount rate of 11 percent. What is the difference between the present value of the settlement at 5 percent and 11 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

At discount rate of 5%

N =40

FV = 0

rate = 5%

PMT = 370,000

use PV funciton in Excel

present value of earnings = 6,348,861.95

now use rate = 11%

present value of earnings at 11% = 3,311,888.80

difference in present value = 3,036,973.15

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