Question

A brilliant young scientist is killed in a plane crash. It is anticipated that he could have earned $370,000 a year for the next 40 years. The attorney for the plaintiff’s estate argues that the lost income should be discounted back to the present at 5 percent. The lawyer for the defendant’s insurance company argues for a discount rate of 11 percent. What is the difference between the present value of the settlement at 5 percent and 11 percent? Compute each one separately

Answer 1

Answer:

A higher discount rate generated a lower present value.

plaintiff at 11% offers $6,348,861.951

insurance offer at 5% ask for $3,311,888.802

Insurance is lower by (2,677,26.851)

Explanation:

A higher discount rate generated a lower present value.

settlement at 5%

annuity of 370,000 for 40 years

$C * \frac{1-(1+r)^{-time} }{rate} = PV$

$370,000 * \frac{1-(1+0.05)^{-40} }{0.05} = PV$

PV = 6,348,861.951

settlement at 11%

$370,000 * \frac{1-(1+0.11)^{-40} }{0.11} = PV$

PV = 3,311,888.802

Diference between values

6,348,861.951

(3,311,888.802)

(2,677,26.851)