<div class="txt-body question-body"><div class="feedback-rating abuse-flag" data

Question

<div class="txt-body question-body"><div class="feedback-rating abuse-flag" data-questionid="12226209"></div><div class="ugc-base"><p>A brilliant young scientist is killed in a plane crash. It isanticipated that he could have earned $370,000 a year for the next40 years. The attorney for the plaintiff&#8217;s estate argues that thelost income should be discounted back to the present at 5 percent.The lawyer for the defendant&#8217;s insurance company argues for adiscount rate of 11 percent. What is the difference between thepresent value of the settlement at 5 percent and 11 percent?Compute each one separately. Use Appendix D for an approximateanswer but calculate your final answer using the formula andfinancial calculator methods.</p><div style="background-color:transparent;"></div></div></div>

Explanation / Answer

&lt;div class=&quot;txt-body answer-body&quot;&gt; &lt;div class=&quot;answer-given-body ugc-base&quot;&gt; &lt;p&gt;Solution:&lt;/p&gt;&lt;p&gt;To compute the present value of the future cah flow annuity wecan calculate using the formula&lt;/p&gt;&lt;p&gt;= 370000/(1+.11)^1 + 370000/(1+.11)^2+........370000/(1+.11)^40&lt;/p&gt;&lt;p&gt;Similarly for 5 percent&lt;/p&gt;&lt;p&gt;= 370000/(1+.05)^1 + 370000/(1+.05)^2+........370000/(1+.05)^40&lt;/p&gt;&lt;p&gt;Using the financial calculator we can calculate the presentvalue annuity interest factor for 40 years 11% = 8.9511&lt;/p&gt;&lt;p&gt;Hence the present value for 11 % would be = 370000*8.9511 =$3311907&lt;/p&gt;&lt;p&gt;Similarly the present value for 5% would be = 370000*17.1591 =$6348867&lt;/p&gt;&lt;p&gt;&lt;strong&gt;Hence the difference would be = $3036960&lt;/strong&gt;&lt;/p&gt;&lt;p&gt;&lt;strong&gt;Thank you.&lt;/strong&gt;&lt;/p&gt; &lt;/div&gt; &lt;/div&gt;

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