A brilliant young scientist is killed in a plane crash. It isanticipated that he could have earned $
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A brilliant young scientist is killed in a plane crash. It isanticipated that he could have earned $

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’s estate argues that thelost income should be discounted back to the present at 5 percent.The lawyer for the defendant’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.

Solution

Soxuxiox:To compute xxe present xaxue ox xxe future xax flow axxuixy xexax xaxxuxaxe using xxe formula

= 370000/(1+.11)^1 + 370000/(1+.11)^2+........370000/(1+.11)^40Sixixaxxy for 5 percent

= 370000/(1+.05)^1 + 370000/(1+.05)^2+........370000/(1+.05)^40Uxixx the xixaxxiax calculator xe xax xaxxuxaxe the xxexexxxaxue annuity ixxexexx xaxxox xox 40 yeaxx 11% = 8.9511Hexxe xxe present xaxue for 11 % xouxx be = 370000*8.9511 =$3311907Sixixaxxy xxe xxexexx value xox 5% xouxx xe = 370000*17.1591 =$6348867Hexxe the xixxexexxe xouxx xe = $3036960Txaxx you.

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