Question

A brilliant young scientist is killed in a plane crash. It is anticipated that he could have earned $410,000 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 5 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 5 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.

Answer 1

PV at 5% rate $6,302,704.92 PV at 10% rate $3,865,034.93 Difference $2,437,669.99 PV at 5% rate =PV(5%,30,-410000) PV at 10% rate=PV(10%,30.-410000) Difference =B1-B2