Question

5. (10) Fatal Worksite Accident Damage Award (Chapter 9)

Jim was a construction worker who died in a worksite accident through the negligence of his employer. At the time of his death at 40, he was earning $85,000 a year. The average worker in his occupation and at his age works to the age of 60. In his occupation, earnings after the age of 40 stay constant in nominal terms (since older construction workers though more experienced are less energetic than younger construction workers). The (nominal) discount rate, r, is 5%. The courts have awarded John's wife and children the present (at the time of his death) value of his future earnings as damages, to be paid by the construction company.

a) (4)   Set up an expression for the present value of John's future earnings.

b) (3)   Calculate the dollar amount of the award.

(The calculations are easier if you use continuous discounting. If you work with discrete discounting, make use of the following hints: i) The value of $Y received at the end of every year forever is $Y/r; and ii) the value of $Y received at the end of every year for twenty years equals the value today of $Y received at the end of every year forever minus the value today of $Y received every year forever, discounted by twenty periods.)

c) (3)   Should the courts have awarded additional damages for the emotional suffering John's wife and children have experienced as a result of John's death? Briefly give one argument for the additional damages and one reason against.

Answer 1

A) At the time of Jim's death at 40, he was earning $85,000 a year.

Earnings after the age of 40 stay constant in nominal terms

Discount rate = 5%

Expression for the present value of future earnings = PV = FV(1+r)ⁿ

= $ 85000(1+0.05)¹ + $ 85000(1+0.05)² ........+ .... +....+   $ 85000(1+0.05)²⁰

B)

PV= $ 85000 / (1+0.05)¹  = $ 80952.38

PV=$ 85000 / (1+0.05)² = $ 77272.72

PV=$ 85000 / (1+0.05)³= $ 73913.04

PV=$ 85000 1 / (1+0.05)⁴ = $ 70833.33

PV=$ 85000 1 / (1+0.05)⁵ = $ 67460.31

PV=$ 85000 1 / (1+0.05)⁶ = $ 64393.93

PV=$ 85000 1 / (1+0.05)⁷ = $ 61594.20

PV=$ 85000 1 / (1+0.05)⁸ = $ 59027.77

PV=$ 85000 1 / (1+0.05)⁹ = $ 56291.39

PV=$ 85000 1 / (1+0.05)¹⁰ = $ 53797.46

PV=$ 85000 1 / (1+0.05)¹¹ = $ 51515.15

PV=$ 85000 1 / (1+0.05)¹² = $ 49132.94

PV=$ 85000 1 / (1+0.05)¹³ = $ 46961.32

PV=$ 85000 1 / (1+0.05)¹⁴ = $ 44736.84

PV=$ 85000 1 / (1+0.05)¹⁵ = $ 42713.56

PV=$ 85000 1 / (1+0.05)¹⁶ = $ 40865.38

PV=$ 85000 1 / (1+0.05)¹⁷ = $ 38990.82

PV=$ 85000 1 / (1+0.05)¹⁸ = $ 37280.70

PV=$ 85000 1 / (1+0.05)¹⁹ = $ 36956.52

PV=$ 85000 1 / (1+0.05)²⁰ = $ 34000

C) The courts should have awarded additional damages for the emotional suffering John's wife and children have experienced as result of John's death because-

He died in a worksite accident through the negligence of his employer. There is no fault of jim. So the court should have awarded additional damages for the emotional suffering as maybe John was the only man who is a source of income in their house. So this additional damage will help the family to get economical support to stand up.

On the other hand, as jim died because of the employer's fault, the court should punish the employer by charging fine to cover additional damages caused to jim's family. Instead of court employer should be responsible to cover additional damage and cost..