A brilliant young scientist is killed in a plane crash. It is anticipated that h
ID: 3144398 • Letter: A
Question
A brilliant young scientist is killed in a plane crash. It is anticipated that he could have earned $360,000 a year for the next 30 years. The attorney for the plaintiff’s estate argues that the lost income should be discounted back to the present at 4 percent. The lawyer for the defendant’s insurance company argues for a discount rate of 10 percent. What is the difference between the present value of the settlement at 4 percent and 10 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 4% rate
PV at 10% rate
Difference
Explanation / Answer
Explanation :
PV4%= A×({1-[1/(1+i)n]}/i)
= $360,000×({1-[1/1.0430]}/0.04)
= $360,000×(0.69/0.04)
=$6225131.99
PV10%= A×({1-[1/(1+i)n]}/i)
= $360,000×({1-[1/1.1030]}/0.10)
= $3393689.21
Difference = $6225131.99-$3393689.21=$2831442.78
Present value PV at 4% rate $6225131.99 +-.01% PV at 10% rate $3393689.21 +-.01% Difference $2831442.78 +-.01%Related Questions
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