Question

Max was injured and can no longer work. As a result of a lawsuit, he is to be awarded the present value of the income he would have received over the next 25 years. His income at the time was $30,000 per year, increasing by $1,500 per year. What will be the amount of his award, assuming continuous income and a 6% interest rate?

Answer 1

Answer: the amount of Max's award, assuming continuous income and a 6% interest rate, would be approximately $346,474.50.

Explanation:

To calculate the amount of Max's award, we need to determine the present value of the income he would have received over the next 25 years. The formula for calculating the present value of a continuous income stream is:

PV = (A / r) * (1 - (1 + r)^(-n))

Where:

PV = Present value

A = Annual income

r = Interest rate

n = Number of years

In this case, Max's annual income is $30,000, which increases by $1,500 per year. The interest rate is 6%, and he would have received income for 25 years.

Let's calculate the present value:

PV = ($30,000 / 0.06) * (1 - (1 + 0.06)^(-25))

= (500,000) * (1 - (1.06)^(-25))

= (500,000) * (1 - 0.307051)

≈ $346,474.50