Question

You are offered a court settlement in the following terms: you will receive 5 equal payments...

You are offered a court settlement in the following terms: you will receive 5 equal payments of $8,262 each every year, with the first payment being made 3 years from now. The current annual interest rate is 5%. Assume yearly compounding. What is this settlement worth in present value terms?

Homework Answers

Answer #1

Below is the formula of present value that can be used to find the PV of the cash flows:

Installment Settlement Amount Formula for PV of Settlement Amount PV
1 $8,262 = $8,262/(1+5%)^3 $7,137.03
2 $8,262 = $8,262/(1+5%)^4 $6,797.17
3 $8,262 = $8,262/(1+5%)^5 $6,473.49
4 $8,262 = $8,262/(1+5%)^6 $6,165.23
5 $8,262 = $8,262/(1+5%)^7 $5,871.65
Total $32,445

Hence, the final settlement worth in present value terms is $32,445.

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