John Aitorea was seriously injured in an industrial accident. He sued the responsible parties and was...

John Aitorea was seriously injured in an industrial accident. He sued the responsible parties and was awarded a judgement of $2 million dollars. Today, he and his attorney are attending a settlement conference with the defendants. The defendants have made an initial offer of $156,000 per year for 25 years. John plans to counteroffer at $255,000 per year for 25 years. Both the offer and the counteroffer have a present value of $2 million, the amount of the judgement. Both assume payments at the end of the year.

What interest rate assumption have the defendants used in their offer?
What interest rate assumption have John and his lawyer used in their counteroffer?
Suppose John is willing to settle for an annuity that carries an interest rate assumption of 9%. What annual payment would be acceptable to him?

John Aitorea was seriously injured in an industrial accident. He sued the responsible parties and was awarded a judgement of $2 million dollars. Today, he and his attorney are attending a settlement conference with the defendants. The defendants have made an initial offer of $156,000 per year for 25 years. John plans to counteroffer at $255,000 per year for 25 years. Both the offer and the counteroffer have a present value of $2 million, the amount of the judgement. Both assume payments at the end of the year.

What interest rate assumption have the defendants used in their offer?
What interest rate assumption have John and his lawyer used in their counteroffer?
Suppose John is willing to settle for an annuity that carries an interest rate assumption of 9%. What annual payment would be acceptable to him?

Expert Solution

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jeff jeffy answered 1 year ago

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