Question

It is now December 31, 2014 (t=0), and a jury just found in favor of a woman who sued the city for injuries sustained in a January 2013 accident. She requested recovery of lost wages plus $100,000 for pain and suffering plus $20,000 for legal expenses. Her doctor testified that she has been unable to work since the accident and that she will not be able to work in the future. She is now 62, and the jury decided that she would have worked for another three years. She was scheduled to have earned $34,000 in 2013. (To simplify this problem, assume that the entire annual salary amount would have been received on December 31, 2013.) Her employer testified that she probably would have received raises of 3% per year. The actual payment for the jury award will be made on December 31, 2015. The judge stipulated that all dollar amounts are to be adjusted to a present value basis on December 31, 2015, using a 7% annual interest rate and using compound, not simple, interest. Furthermore, he stipulated that the pain and suffering and legal expenses should be based on a December 31, 2014, date. How large a check must the city write on December 31, 2015? ( Hint: use a time line with actual dates labeled and carefully think about cash flows along the time line.)

Answer 1

ANSWER:

Estimated Salary Amount will be recieved in following year at the end of year :

In year 2013 = 34000

2014 = 34000*1.03

2015 = 34000*1.03^2

2016 = 34000*1.03^3

2017 = 34000*1.03^4

Check must the city write on December 31, 2015 = 34000*1.07^2 + 34000*1.03*1.07 + 100000*1.07 + 20000*1.07 + 34000*1.03^2 + 34000*1.03^3/1.07 + 34000*1.03^4/1.07^2

Check must the city write on December 31, 2015 = $ 309,014.91

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