Question

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?

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.