Question

Unfortunately you were in a traffic accident (by the way, did you know that there were approx. 40,000 traffic deaths in America in 2018, and this is normal! Another 4.5 million people were seriously injured in traffic accidents in America in 2018! So please drive carefully!). After the accident, you won your lawsuit settlement of $100,000. However, the settlement called for $25,000 to be paid today, $25,000 to be paid in exactly 20 years, and $2,500 to be paid every year at the end of the year for 20 years, starting in year 1. And you’ll have to pay your lawyer her $15,000 fee immediately (today). What is the present value of this settlement to you if the discount rate is 11%?

a. $30,000.00 b. $33,009.17 c. $35,000.00 d. $37,282.14 e. $41,566.10

Can I get a step by step so I can understand how to do this on my own?

Answer 1

Present value of winnings :Amount received today +[PVA11%,20*annual receipts]+[PVF11%,20*amount received at end of 20 years]

25000 +[7.96333*2500]+ [.12403*25000]

25000 + 19908.33+ 3100.75

   $ 48009.08

present value of this settlement to you =present value of winnings -payment to lawyer

           = 48009.08- 15000

         = $ 33009.08

correct option is "B"-APPROX TO 33009.17

**FIND ALL PRESENT VALUE ANNUITY FACTOR AND PRESENT VALUE FACTOR FROM THEIR tABLE RESPECTIVELY.