You just settled an insurance claim that calls for increasing payments over a 10-year period. The...

You just settled an insurance claim that calls for increasing payments over a 10-year period. The first payment will be paid one year from now in the amount of $5,000. The following payments will increase by 3.5 percent annually. What is the value of this settlement to you today if you can earn 6.5 percent on your investments?

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Expert Solution

The cash flows represent a growing annuity.
PV of a growing annuity is given by the formula:
= [(P/(r-g)]*[1-((1+g)/(1+r))^n]
where
P = First payment
r = rate per period
g = growth rate
n = number of periods
Substituting values we have:
Value of the settlement today = ((5000/(0.065-0.035))*((1-(1.035/1.065)^10) =	$ 41,422.89

jeff jeffy answered 1 year ago

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