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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

PV AND A LAWSUIT SETTLEMENT 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 $300,000 for pain and suffering plus $60,000 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 3 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 an 8% 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?

Summary Introduction

To Determine: The amount that is to write by city.

Introduction: The present value is regularly utilized in valuation to discount projections that organizations make about themselves so they can make sense of the amount that is required by the organization's price of stock or possibly its value of equity.

Explanation

Determine the amount of salary from years 2017 to 2020.

Using a excel spreadsheet, the amount of salary for 2017 is determined as $37,080, for 2018 is determined as $38,192.40, for 2019 is determined as $39,338.17 and for 2020 is determined as $40,518.32

Excel Spreadsheet:

Excel Workings:

Therefore the amount of salary for 2017 is $37,080, for 2018 is $38,192.40, for 2019 is $39,338.17 and for 2020 is $40,518.32.

Determine the payments for year 2017

Payments2017=[Wages+LegalExpenses+AmountofSalary]=[$300,000+$60,000+$37,080]=$397,080

Therefore the payments for year 2017 is $397,080

Determine the pain and suffering and legal costs compounded back to year 2017

CompoundedPayment2017=[AmountofSalary2016×(1+InterestRate)2+Payments2017×(1+InterestRate)1]=[($36,000×(1+8%)2)+($397,080×(1+8%)1)]=[$41,990.40+$428,846.40]=$470,836.80

Therefore the pain and suffering and legal costs compounded back to year 2017 is $470,836

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