Question

What is the discount rate implicit in the firm’s offer?

27. You are injured in an accident and the guilty party's insurance company agrees to make the annual payments, beginning immediately, shown in the table below, once the settlement contract is written and signed. While recovering at home and waiting for the contract you watch Jerry Springer and the Maury show and notice the "I want my money now" commercials. You contact the advertiser and the firm offers you $375,000 in exchange for the settlement cash flow. What is the discount rate implicit in the firm's offer? Year: Settlement: 2019 $120,000 2020 $100,000 Insurance Settlement Payments 2021 2022 2023 2024 $90,000 $80,000 $70,000 $60,000 2025 $50,000 2026 $40,000 2027 $25,000 a. 11.63% b. 12.05% c. 12.44% d. 12.73% e. None of the above answers is correct.

Answer 1

IRR technique needs to be used to evaluate the question.

PV of the amounts should be equal to $375000.

Let the rate be 10%.

PV, in this case, would be $446150

Let rate be 20%

PV, in this case, would be $337200

Applying interpolation,

10%+ [{(446150-375000)/(446150-337200)}*10]

=16.50%

Hence, option (e) i.e. none of the above answers is correct.