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It is now December 31, 2017 (t = 0), and a jury just found in favor...

It is now December 31, 2017 (t = 0), and a jury just found in favor of a woman who sued the city for injuries sustained in a January 2016 accident. She requested recovery of lost wages plus $400,000 for pain and suffering plus $80,000 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 $36,000 in 2016. (To simplify this problem, assume that the entire annual salary amount would have been received on December 31, 2016.) 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, 2018. The judge stipulated that all dollar amounts are to be adjusted to a present value basis on December 31, 2018, 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, 2017, date. How large a check must the city write on December 31, 2018? Do not round intermediate calculations. Round your answer to the nearest cent.

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Answer #1

1. Future Value of Salary on December 21 2018 = 2016 Salary * (1 + r)^2 + 2017 Salary * (1 + r) + 2018 Salary

Future Value of Salary on December 21 2018 = 36000 * (1 + 0.07)^2 + 36000 * 1.03 * (1 + 0.07) + 36000 * 1.03 * 1.03

Future Value of Salary on December 21 2018 = 40000 * 1.1449 + 37080 * 1.07 + 38192.40

Future Value of Salary on December 21 2018 = $119084.40

2. Future Value of Pain Suffering Cost = Amount * (1 + r)

Future Value of Pain Suffering Cost = 400000 * (1 + 0.07)

Future Value of Pain Suffering Cost = 428000

3. Future Value of Legal Expenses Cost = Amount * (1 + r)

Future Value of Legal Expenses Cost = 80000 * (1 + 0.07)

Future Value of Legal Expenses Cost = 85600

Check, the city must write on December 31, 2018 = 119084.40 + 428000 + 85600

Check, the city must write on December 31, 2018 = $632684.40

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