You are in a car accident, and you receive an insurance settlement of $5,000 per year for the next 3 years. The first payment is to be recei

You are in a car accident, and you receive an insurance settlement of $5,000 per year for the next 3 years. The first payment is to be received today. The second payment is to be received one year from today, and the third payment 2 years from today. If the interest rate is 6%, the present value of the insurance settlement is:

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  1. Answer:

    Explanation:

    Present value is found by discounting future values using a discount/interest rate.

    Current year PV of $5000 is $5000.

    A year in future PV is $5000/(1+r)^n which is $5000/(1.06)^1

    = $4,716.98 is what $5000 in a year from now is worth.

    Two years in future is $5000/(1+r)^r which will now be $5000/(1.06)^2

    = $4,449.98 is what $5000 two years from now is worth today.

    Add all figures up to get your Present value.

    =5000 + 4,716.98 + 4,449.98

    = $14,166.96 is the present value.

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