Question

You are in talks to settle a potential lawsuit. The defendant has offered to make annual payments of $18,000, $26,500, $46,000, and $69,000 to you each year over the next four years, respectively. All payments will be made at the end of the year. If the appropriate interest rate is 4.3 percent, what is the value of the settlement offer today? $159,500.00 $149,982.85 $146,505.72 $124,858.40 $140,465.70

Answer 1

PV = 140,465.70$

Explanation:

Since the values will be paid in the future then we need to find the Present Value of each of the amounts factoring in a interest rate of 4.3%

Given

1) Amount = 18,000$ : Period(t) = 1 year

2) Amount = 26,500$ : Period(t) = 2 years

3) Amount = 46,000$ : Period(t) = 3 years

2) Amount = 69,000$ : Period(t) = 4 years

The Present Value formula is as follow

`PV = (Amount)/((1 + rate)^t)`

Solving for each of the payments.

`PV_(1)  = (18000)/((1 + 0.043)^1) = 17257.91\\ PV_(2)  = (26500)/((1 + 0.043)^2) = 24359.99\\ PV_(3)  = (46000)/((1 + 0.043)^3) = 40541.98\\ PV_(4)  = (69000)/((1 + 0.043)^4) = 58305.81`

Now the total Present Value is calculated by adding all the above answers

`PV = PV_(1) + PV_(2) + PV_(3) + PV_(4)\\ PV = 140,465.69`