Question

You are offered a court settlement in the following terms: you will receive 6 equal payments of $1,705 each every year, with the first payment being made 3 years from now. The current annual interest rate is 6%. Assume yearly compounding. What is this settlement worth in present value terms?

Answer 1

Equal annual payments to be received each year = $1705

Calculating the Present Value of equal annual payment at year end 3 as 1st payment is received on that day:-

Where, C= Periodic Payments =$1,705

r = Periodic Interest rate = 0.06

n= no of periods =6

Present Value at the end of year 3= $8,887.08

Now, Calculating the value at today, of Present value at the end of year 3:-

So, settlement worth in present value terms is $ 7461.76

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