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?

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 2 years ago

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