Question

You are awarded $500,000 in a lawsuit, payable immediately. The defendant makes a counteroffer of $50,000...

You are awarded $500,000 in a lawsuit, payable immediately. The defendant makes a counteroffer of $50,000 per year for the first three years, starting at the end of the first year, followed by $60,000 per year for the next 10 years. Should you accept the offer if the discount rate is 12%? How about if the discount rate is 8%?

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Answer #1

1. If the discount rate, r = 12%

Then, the PV of the offer is:

PMT1 = 50,000

n1 = 3

PMT2 = 60,000

n2 = 10

The present value of the offer is less than the immediate award of $500,000. So, we should not accept this offer at the discount rate of 12%.

2. If the discount rate, r = 8%

Then, the PV of the offer is:

PMT1 = 50,000

n1 = 3

PMT2 = 60,000

n2 = 10

The present value of the offer is less than the immediate award of $500,000. So, we should not accept this offer at the discount rate of 8%

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