Judy Nakamura is the risk manager of Hardin-Ferris Company (HFC), a wood products company. Several questions have come up that will require calculations. Perform the following calculations for Judy. Show your work as partial credit may be awarded. Points are as indicated.
a. A customer was injured at an HFC lumber and building products store. Judy’s liability insurer made an offer to settle the liability claim. The injured person’s lawyer made a counter offer. Under the counter-offer, HFC would pay the injured person $40,000 per year for five years, with the first payment four years from today. Assuming a discount rate of 7 percent, what is the present value of this settlement offer? (2 points)
| Calculate present value of $40,000 to be received for 5 years | |||||
| Present value | Annuity amount*(1-(1+r)^-n)/r | ||||
| Present value | 40000*(1-(1.07^-5))/0.07 | ||||
| Present value | 40000*4.1002 | ||||
| Present value | $164,007.90 | ||||
| The amount of $164,007.90 would be receiving four years from today | |||||
| Present value | 164007.90*(1/(1.07^4)) | ||||
| Present value | $125,120.84 | ||||
| Thus, present value of this settlement offer is $125,120.84 | |||||
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