Question

You are serving on a jury. A plaintiff is suing the city for injuries sustained after falling down an uncovered manhole. In the trial, doctors testified that it will be 5 years before the plaintiff is able to return to
work. The jury has already decided in favor of the plaintiff. You are the foreman of the jury and propose that the jury gives the plaintiff an award to cover the following items:

(1) The present value of two years back pays ($34,000 in 2018, $36,000 in 2019). Assume that it is January 1, 2020, and that all salary is received at year-end.
(2) The present value of 5 years of future salary (2020-2024). Assume that the plaintiff’s salary would increase at a rate of 3% a year.
(3) $100,000 for pain and suffering
(4) $20,000 for court costs

Assume an interest rate of 7%. What should be the size of the settlement?

Answer 1

Given Detaills

interest rate is 7%

Pain and Suffering reward= $100000

Court Costs = $20000

Present Value of the Lost Back pay = $34,000*1.07 + 36,000

Present Value of the Lost Back pay = $72,380

Future value of Salaries for 5 years

S1=Cash Flow 2020 = 36,000*1.03 = $37,080

S2=Cash Flow 2021 = 37,080*1.03 = $38,192.40

S3=Cash Flow 2022 = 38,192.40*1.03 = $39,338.17

S4=Cash Flow 2023 = 39,338.17*1.03 = $40,518.32

S5=Cash Flow 2024 = 40,518.32*1.03 = $41,733.87

Present value of future salary = S1/(1 + r)1 + S2/(1 + r)2 + S3/(1 + r)3 + S4/(1 + r)4 + S5/(1 + r)5

Present Value of Future Salaries = $37,080/1.07 + 38,192.40/1.07^2 + 39,338.17/1.07^3 + 40,518.32/1.07^4 + 41,733.87/1.07^5

Present Value of Future Salaries = $160,791.50

Size of Settlement = Present value of future salaries+Present value of back pay+pain and suffering reward+ court costs

Size of Settlement = $72,380 + $160,791.50+$100000+$20000

Size of Settlement = $353,171.50