Question

Problem 11-3 Effect of discount rate (LO11-3) A brilliant young scientist is killed in a plane crash. It is anticipated that he could have earned $220,000 a year for the next 25 years. The attorney for the plaintiff's estate argues that the lost income should be discounted back to the present at 5 percent. The lawyer for the defendant's insurance company argues for a discount rate of 13 percent What is the difference between the present value of the settlement at 5 percent and 13 percent? Compute each one separately. Use Appendix 2 for an approximate answer but calculate your final answer using the formula and financial calculator methods (Do not round Intermediate calculations. Round your answers to 2 decimal places.) Present Value PV at 5% rate PV at 13% rate Derence

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

B C D Annual Earning Years $220,000.00 25 PV at 5% PV at 13% Difference Present value $3,100,667.80 $1,612,596.70 $1,488,071.11

Cell reference -

В -Nm 7 220000 Annual Earning Years 25 PV at 5% PV at 13% Difference Present value =PV(5%,C3,-C2,0) =PV(0.13,C3,-C2,0) =C6-C7 000

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.