Homework Answers
Question A:
Calculation of Present value of Settlement Amount
P = Annual Cash Flow = $175,000
n = 10 years
r = risk free treasury rate = 1.75%
Present value of Settlement = P [1 - (1+r)^-n] / r
= $175,000 *[1 - (1+1.75%)^-10] / 1.75%
= $175,000 *[1 - 0.84072859899] / 0.0175
= $175,000 * 0.159271401 / 0.0175
= $27,872.4952 / 0.0175
= $1,592,714.01
Therefore, present value of settlement is $1,592,714.01
Question B:
If the Federal Reserve targets lower federal funds rate, which decreases the lower federal funds rate, which decreases the risk free discount rate, then he received lower settlement because the annual income has been disounted at higher rates and taken the settlement but these funds are deposited at lower rate.
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