Q11-3BP A brilliant young scientist is k... [FREE SOLUTION]

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Foundations Of Financial Management

Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen

Business Studies

16th Edition 路 768 pages

ISBN: 9781259277160

Chapter 4: Q11-3BP (page 363)

A brilliant young scientist is killed in a plane crash. It is anticipated that he could have earned $240,000 a year for the next 50 years. The attorney for the plaintiff鈥檚 estate argues that the lost income should be discounted back to the present at 4 percent. The lawyer for the defendant鈥檚 insurance company argues for a discount rate of 8 percent. What is the difference between the present value of the settlement at 4 percent and 8 percent? Compute each one separately

Short Answer

Expert verified

Present value annuity of the settlement at 4% is $5,155,680 and 8% is $2,935,920. A higher discount rate is generated a lower present value. Insurance is lower by $2,219,760.

Step by step solution

Computing present value annuity-

$\begin{matrix} Presentvalueannuity = Principal 脳 [\frac{1 鈭� {(1 + r)}^{鈭� n}}{r}] \\ = $ 240, 000 脳 [\frac{1 鈭� {(1 + 0.04)}^{鈭� 50}}{0.04}] \\ = $ 240, 000 脳 21.482 \\ = $ 5, 155, 680 \end{matrix}$

Computing present value annuity-

$\begin{matrix} Presentvalueannuity = Principal 脳 [\frac{1 鈭� {(1 + r)}^{鈭� n}}{r}] \\ = $ 240, 000 脳 [\frac{1 鈭� {(1 + 0.08)}^{鈭� 50}}{0.08}] \\ = $ 240, 000 脳 12.233 \\ = $ 2, 935, 920 \end{matrix}$

Computing the difference between the present value of the settlement at 4% and 8%-

Present value annuity 4%	$5,155,680
Less: Present value annuity 8%	($2,935,920)
	$2,219,760

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Short Answer

Step by step solution

Computing present value annuity-

Computing present value annuity-

Computing the difference between the present value of the settlement at 4% and 8%-

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