Silly Cat Training (SCT), a cat training school, is being sued by the parents of
ID: 2811414 • Letter: S
Question
Silly Cat Training (SCT), a cat training school, is being sued by the parents of a child who was bitten by a cat in the custody of SCT. Two out-of-court settlements are under consideration. Under the first, SCT would pay the injured party $100,000 per year for 10 years, with the first payment one year from today. Under the second alternative, SCT would pay the injured party $100,000 today and $1,000,000 ten years from today. In your report, describe which of these offers is best from SCT’s perspective, assuming a 5 percent interest rate?
1) Present value of 1st settlement: $100,000 per year for ten years
2) Present value of 2nd settlement: $100,000 today and $1,000,000 ten years from today
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Explanation / Answer
SCT out of court settlement option Rate of interest 5% Option 1 Payment schedule 30-09-2018 30-09-2019 30-09-2020 30-09-2021 30-09-2022 30-09-2023 30-09-2024 30-09-2025 30-09-2026 30-09-2027 30-09-2028 0 100000 100000 100000 100000 100000 100000 100000 100000 100000 100000 Present Value 7,72,029.47 Option 2 Payment schedule 30-09-2018 30-09-2019 30-09-2020 30-09-2021 30-09-2022 30-09-2023 30-09-2024 30-09-2025 30-09-2026 30-09-2027 30-09-2028 100000 0 0 0 0 0 0 0 0 0 1000000 Present Value 7,13,667.11 Option 1 is better SCT out of court settlement option Rate of interest 5% Option 1 Payment schedule 30-09-2018 30-09-2019 30-09-2020 30-09-2021 30-09-2022 30-09-2023 30-09-2024 30-09-2025 30-09-2026 30-09-2027 30-09-2028 0 100000 100000 100000 100000 100000 100000 100000 100000 100000 100000 Present Value 7,72,029.47 Option 2 Payment schedule 30-09-2018 30-09-2019 30-09-2020 30-09-2021 30-09-2022 30-09-2023 30-09-2024 30-09-2025 30-09-2026 30-09-2027 30-09-2028 100000 0 0 0 0 0 0 0 0 0 1000000 Present Value 7,13,667.11 Option 1 is better
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